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By New_Deal_democrat April 24, 2015 11:36 am
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US housing market continues slow improvement

With almost all of the March housing data reported, let's take an overall look at this very important leading component of the economy.  As always, the paradigm is:

1.  Interest rates lead new home building
2.  New home building leads house prices

Let's start with this graph of interest rates for a 30 year conventional mortgage:

Mortgage interest rates fell below 4% at the beginning of this year, and have stayed at or below 4% ever since.  As a result, we should expect an increase in home building activity. 

To that point, here's an updated graph of the YoY change in mortgage rates (inverted, blue) compared with the YoY change in housing permits (red, in100's):

The interest rate environment for buyers having improved, the housing market is beginning to respond positively, aided by the demographic tailwind of the large Millennial generation reaching prime first home-buying stage.

Next, here is a more comprehensive look at house building and buying, showing the YoY% change in housing starts (blue), permits (red), new single family home sales (green), and existing home sales (brown) since midyear 2013:

You can see how the "taper tantrum" caused the housing market to stall and even slightly decline in early 2014, and its gradual improvement since.

The last two months have seen poor housing starts data, but starts, unlike permits, are affected by unusually poor weather, and are much more volatile than permits.  Therefore I give permits more prominence. 

Since permits (blue) and new single family home sales (red) are the most forward-looking data, let's look at them.  Here they are monthly over the last 5 years:

Despite the angst that March was below expectations, the fact is that February new home sales made a  new post-recession high, and permits equalled their previous high.  The improvement in the new home market is even more prominent when we average the data quarterly:

Now let's compare sales with prices.  Here is the YoY% growth in new single family home sales (blue) compared with the YoY% change in median prices for new homes (red), averaged quarterly:

It's pretty easy to see that home sales lead home prices by 3 - 6 months.

The same pattern of sales leading prices exists for existing homes:

In summary, I anticipate that continuing lower interest rates will lead to more improvement in new home sales and building in the coming months.  I further expect faster price growth.

Next week first quarter 2015 GDP will be reported, including private residential spending, an important long leading indicator. 

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