Kristina Hooper, CFP®, CIMA® is head of portfolio strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Once at the heart of one of the most crushing crises in history, the housing market is looking a lot healthier these days. Given its impact on jobs and the consumer psyche, a turnaround in housing could signal that the economy may be on the mend too.
With hopes of a speedier recovery in mind, investors bid up stocks early last week on positive economic news, sending the S&P 500 and the Dow Jones Industrial Average higher. But by Friday the major averages had given back almost all of their gains. Overall, economic data was mixed, but much of it points to economic improvement.
Specifically, housing is showing signs of a solid recovery. September existing-home sales rose an annualized 475,000, beating expectations. While sales are down 1.7% month-over-month, they are up 11% year-over-year. The national median existing-home price for all housing types was $183,900 in September, which is an increase of 11.3% from a year ago. But the recovery is not limited to existing homes.
Housing starts, a measure of new home construction, surged 15% in September to a seasonally adjusted annual rate of 872,000 units. The pipeline remains robust with September building permits rising 11.6% to an annualized rate of 894,000 units. Both the housing starts and building permits numbers for September are the strongest we have seen since July 2008. And while mortgage applications have decreased in the past few weeks, they are still near three-year highs, according to the Mortgage Bankers Association.
Raising the Roof
A housing recovery can strengthen the economy in two ways. First, construction jobs may grow. That’s sorely needed given that the construction industry has an extremely high unemployment rate: 11.9% in September 2012. While that’s down from 13.3% in September 2011, it remains the highest unemployment rate of any industry reported by the Bureau of Labor Statistics. By comparison, as of September 2012, the transportation and utilities industries have a 6.3% unemployment rate; leisure and hospitality services have a 9.7% unemployment rate; and the mining, quarrying and oil and gas extraction industries have a 4.9% unemployment rate. Housing also has a “multiplier effect” beyond just jobs, one that kicks in as demand for a variety of building materials rises.
But more importantly, a rise in home prices and higher existing-home sales can vastly improve consumer sentiment. In practical terms, with home values rising, more consumers can take advantage of lower interest rates and refinance, providing them with more spending money. The two largest assets most consumers have are their homes and their 401(k) plans. Many consumers may have moved to cash or fixed income in their retirement plans and missed out on the stock-market recovery. But as long as they’ve stayed in their houses they’ve likely seen appreciation recently. Psychologically, consumers feel wealthier when home values are higher and they’re likely to spend more. Further, they’re more likely to invest in their homes with remodeling and renovation products if they believe their home is a worthwhile investment, one that is likely to appreciate in the future.
The comeback in housing was even evident in last week’s Leading Economic Indicators Index. The index was up 0.6% in October, well above consensus expectations of 0.2%, largely on the strength of housing and the stock market. Housing also played a key role in the jump in consumer sentiment in early October. With the exception of one brief period, there has never been a recession in the US at a time when the housing sector was strong: since World War II, the only instance in which the economy contracted during a healthy housing market was 2001.*
Perhaps there is a method to Chairman Bernanke’s madness: an improvement in housing might just prove infectious to the entire economy.
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