May 28 2014
Alongside the irises, daffodils, tulips, and other perennials that were popping up (in seasonal parts of the United States) last week, there was a lot of talk about the housing market and what its performance means about the state of the economy. Perceptions varied.
The U.S. housing market has showed improvement in recent years; however, sales slowed during 2013 as interest rates and home prices moved higher. Last week’s housing data showed sales of existing homes were up 1.3 percent for April which was lower than expected, but sales of new single-family homes were up more than expected. In addition, the S&P/Case-Shiller 20-City Composite Home Price Index showed February housing prices had reached levels last seen in 2004.
According to MarketWatch.com, some big-name investors are worried about the housing market’s recovery because younger investors are not inclined to take on mortgage debt. Others suggest homeownership may drop because people are marrying later. Balancing the naysayers are pundits who believe demand for housing will continue to strengthen. Finally, the minutes of the Federal Open Market Committee, which were released last week, showed the Fed recognized recovery in the housing sector remained slow, but expects economic activity to expand at a moderate pace:
“Most participants commented on the continuing weakness in housing activity. They saw a range of factors affecting the housing market including higher home prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input cost pressures, or a shortage in the supply of available lots. Views varied regarding the outlook for the multifamily sector, with the large increase in multifamily units coming to market potentially putting downward pressure on prices and rents, but the demand for this type of housing [is] expected to rise as the population ages. A couple of participants noted mortgage credit availability remained constrained and lending standards were tight compared with historical norms, especially for purchase mortgages.”
What are we to make of the conflicting opinions? The housing market is considered to be a leading economic indicator. This means it tends to change direction before the economy changes direction and offers some indication about where the economy may be headed. (It should be noted housing data generally is several months old before it is reported.) Housing is not the only leading indicator. The Conference Board tracks an index of leading economic indicators. For April, its Leading Economic Index® showed improvement for a third consecutive month. It’s a reminder of how important it is to pay attention to the big picture.
- Data as of 5/23/141- WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)1.2%2.8%15.2%0.1316.5%5.7%
- 10-year Treasury Note (Yield Only)2.5N/A2.03.13.54.7
- Gold (per ounce) –7.5-6.5-5.16.512.9
- DJ-UBS Commodity Index0.47.92.4-5.52.3-1.1
- DJ Equity All REIT TR Index-0.614.22.511.523.710.3