If you want a gauge of where the stock market is headed, the best place to look might be housing data. At least that's the view of Fred Cannon, chief equity strategist at KBW. Cannon says good housing prices and starts lead to jobs, which in turn lead to a virtuous cycle of more home buying and more jobs.
"The issue is U.S. home prices," explains Cannon in the attached video. "If those continue to move higher, that's a good backdrop for the U.S. economy and a good backdrop for the stock market."
On that front, today's housing data seems bullish at first glance. In March housing starts exceeded 1 million units — the fastest clip since 2008. Within the data, apartment construction rose 31% to levels not seen since 2006. Single-family home starts fell 4.8%. If you're a bear, that last piece of data is more than enough proof that the economic recovery isn't all it would seem, leaving the stock market vulnerable to shocks.
While Cannon picks through select markets for evidence of pricing improvements, the fact remains that most individuals are having a hard time securing loans anywhere near the endlessly hyped record-low rates. A surge in multi-family dwellings creates construction jobs but isn't a sign of a sustainable housing recovery.
Individuals don't pool resources and decide to build an apartment. As Cannon notes in the video, private equity groups like Blackstone (BX) don't need to secure financing the way individuals do. As of the middle of last month, Blackstone had purchased more than $3.5 billion worth of homes. That's not a housing recovery, it's Mr. Potter snapping up all the houses after Bailey Savings and Loan goes belly up.
Buying houses on the cheap and then playing landlord is a great trade for Blackstone, as would-be home buyers continue to show a preference towards renting over buying. Unfortunately it's a lousy trend for Americans looking to buy a home of their own.
Where does that leave the stock market through the prism of housing? They are both being stimulated by outside demand flooding money into a system without organic demand. What happens when the spigot turns off for either market is anyone's guess.