The US housing market has been one of the brightest spots of the economic recovery.
After triggering the great recession through the subprime mortgage crisis eight years ago, the housing market has roared back to life.
And as Wall Street takes stock of the economy in the first half as we head into the second, many economists are convinced that the housing market is the strongest it's been in years. Moreover, economists think this will be the catalyst that powers the economy going forward.
In a note last month, Morgan Stanley economists including Vishwanath Tirupattur wrote:
"Despite a weak first quarter on several fronts of the US economy, the housing sector has been a source of relative strength. In our view, the US housing sector is poised to accelerate into the spring, a traditionally strong period for housing."
And in a note on Wednesday, the same team wrote, "May was arguably the most positive month for housing data in quite some time, and Monday’s construction spending print was the cherry on top."
The raft of housing data that dropped last month mostly beat economists' expectations and confirmed their outlook for 2015.
Let's run through Morgan Stanley's assessment of the main data points on the housing market year-to-date:
- Existing home sales are picking up steam, 6.6% higher for the first three months of this year than the first quarter of 2014. Morgan Stanley notes that all regions of the country have seen growth.
- New home sales have seen "impressive gains," outpacing growth over the past two years. Also, they are well below their average levels as the housing bubble formed in the years leading up to 2007.
- Home prices have risen in the first half of the year. Combining the indexes that measure prices, Morgan Stanley estimates growth of between 4.1% and 6.8%.
- Starts and permits are just slightly higher for the quarter compared to the same period last year (+3.9%). However, the index of building permits, a combination of the tally of permits for new construction and renovations, is up 8%.
All this comes in a year when economic data has largely missed expectations, the economy contracted in the first quarter, and some experts were on the verge of mentioning the dreaded word: "recession."
But the performance of the housing market in the first quarter has economists psyched about the rest of the year.
Deutsche Bank was bullish back in January. And in a note last month with their outlook for the rest of the year, Nishu Sood wrote:
"Housing demand has been strong so far this year and after a weather affected 1Q15, housing starts look to be back on the growth track as well. Nevertheless, investors remain more fixated on the 8 of 10 failure rate housing has shown the past decade. [Higher] interest rates are a potential risk, but as long as their trajectory remains controlled, we think our positive outlook for US new residential construction for 2015 will be confirmed."
On Friday, we got more good news about the economy.
The latest report from the Bureau of Labor Statistics showed that the economy added 280,000 jobs in May, much more than the expectation for 226,000. The unemployment rate ticked up to 5.5% from 5.4% (but for the right reasons), and wages are trending higher.
All of this is good news for housing.
We've seen consistent employment growth in a key demographic that's important for the housing market: the 25-to-34-year-old age group that includes millennials and young families.
In an email on Friday, Realtor.com chief economist Jonathan Smoke noted that the economy has created 3 million jobs over the last 12 months, and 1 million of those jobs have been taken by this age cohort.
Smoke explained why this is good for housing:
"That is the age range for the typical first-time buyer household, which despite its depressed levels in recent years still represents the largest age cohort of home buyers. As that group's economic situation continues to improve, their housing activity follows and has a material impact on both existing and new home sales. With more jobs, more people in the labor force, and higher wages materializing, this spring's strong pace for home sales will continue."
And the big thing to note here is that home ownership among millennials is quite low — between 20% and 30%, as Morgan Stanley highlights. So even as millennials form families and build homes, they have been more likely to rent houses than buy their own property. In fact, they are more likely to rent most things.
Millennials and young families also pose a big risk to the market's continued strength, even as pivotal as they are for holding it together.
Here's Morgan Stanley again:
"Demand for shelter does not necessarily equate to demand for ownership shelter. In fact, as household formations have increased over the past two quarters, the homeownership rate has fallen 70bps to 63.7% (Exhibit 10). To put this number into historical context, we have not seen the homeownership rate lower than this since 1986."
Still, Fundstrat's Tom Lee wrote in a note:
"The most important positive inflection in 2015 has been household formation (posting >1.4mm annualized for 4Q14 and 1Q15), which we see as a measure of organic demand for housing. The drivers have been multiple including pent-up demand, labor recovery, and credit score resets."
Economists and markets are currently looking for the US economy to rebound in the second quarter. And if this bounce back materializes, it will be the housing market that leads the way.
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