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By New_Deal_democrat April 28, 2016 10:08 am
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Housing: April 2016 update

Let me do one of my periodic updates on housing.  As I have often said, I pay a lot of attention to this market because it is probably the single most leading sector of the US economy, with broader consequences one and even two years out.

My mantra is: 

  • interest rates lead sales
  • new single home sales lead permits
  • single family permits lead multi-family permits
  • permits lead prices
  • prices lead inventory

Let's take a look at each of these in order.  Note that in most cases I am breaking out the last 10 years separately because the huge magnitude of the housing bust would make everything that comes after it look pretty horizontal!

1.  Interest rates lead sales

Here are 30 year mortgage rates (inverted) vs permits for single family homes, from the 1960s until 2007:

 

and the last 9 years:

Mortgage interest rates have not made new lows in over 3 years, and sales growth decelerated markedly shortly thereafter.  With lower interest rates in 2015, permits continued to improve slowly, making a new high most recently in February.

2.  New single family home sales lead permits

New home sales tend to peak a number of months before permits, so much so that they are really more of a mid-cycle indicator rather than a long leading indicator:

Here are the last 9 years:

 

New home sales peaked in January 2015.  As indicated above, permits for single family homes have continued to rise at least through this February.

3. Single family permits (usually) lead multi-unit permits

Apartments and condo are something of a substituted good for buyers who ususally would prefer a single family detached residence:

 

Here are the last 9 years:

 

This expansion is an anomaly at the moment, as single family permits made a high two months ago, but multi-unit permits peaked last spring.  Multi-unit construction is extremely volatile, but I am surprised that there has not been further improvement in this segment.

4.  Permits lead prices

It takes a while after the sales trend changes for the message to make it through to sellers:

 

Here are the last 9 years:

 

5. Prices lead inventory

Higher (lower) prices call forth more inventory, as more sellers become optimistic (pessimistic) about receiving a good price.

 

Here are the last 8 years:

 

Put it all together, and here is the current status of the housing market:

1.  The failure to make new lows in interest rates has resulted in a flattening of sales.
2.  Flat sales have percolated through to a deceleration in price growth.
3.  Recent price growth is calling forth more inventory.

The one anomaly in the market is the failure of pent-up demand in the form of the Millennial generation to result in even more multi-family construction.  Since multi-family permits have historically peaked later than single family permits (apartments and condos being something of a substituted good), I am still expecting this to pick up, and apartment vacancies to become less tight.  But without a new low in interest rates, this housing market is battling a formidable headwind.

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