The volatility of the housing market has long been a reflection of American economic activity, itself a somewhat unstable force. The “New Residential Construction Report” expressed data surrounding how many residential construction projects have begun within a certain time versus the number of issued building permits. Analyzed and reported on by the U.S. Department of Housing and Urban Development, housing starts, building permits and housing completions are key economic indicators in considering the housing market not only as a system of vending, but also one of constant (or interrupted) development, reflecting not only national financial welfare but also consumer confidence.
In March of 2018, Time Magazine characterized housing starts as the indicator responsible for predicting every recession since 1960—going on to say that a 7% fall in housing starts was a warning signal that, despite what other economic indicators reflected, the rate of economic advancement was perhaps not as lofty as initially believed. This is to say that, while GDP grows, a falling housing market cannot be overlooked. Housing and its embedded costs—building, purchase, renovations, and maintenance—account for a sixth of the total GDP. This influence is only heightened by the reverberant efficacy of the housing industry. An analysis of housing to some extent determines the supply of preexisting homes on the market, as well as the calibration of mortgage lending and homeowners insurance. An increase in housing starts signals an increase in demand for the construction industry, and their suppliers. It is also indicative of an increase in demand and potential employment for commercial ventures marketing household appliances, furnishings, and other home improvement goods. Home Depot, for example, witnessed a 15% decrease in shares between January and March of 2018, despite earning and sales reports that well exceeded expectations—while it might seem bold to define this decline as a projection of a weakening broad economy, there is a truth to the coupling of commercial performance and economic trajectory. Stores like Home Depot are perhaps somewhat niche markets, but an analysis of business cycle “pivot points” (a daily average high, low and closing prices at the end of the market day) and the performance of housing is a good ledger for considering the agency of housing as a critical economic indicator.
Perhaps one of the greatest draws towards housing as a vital economic indicator is its capacity to guage and budget for future trends. Terri Spath, chief investment officer for Sierra Investment Management, considers housing starts as a “terrific leading indicator of the economy.” Given the many month commitment a buyer is faced with when investing in a new construction housing project, potential homebuyers will often hold off, erring on the side of caution if there is potential for an imminent economic downturn. “Who wants to engage in the biggest investment of their life — buying a house — if they’re worried about losing their job?”, asks Sam Stoval, chief investment strategist for CFRA research firm. This sentiment, above all, is a demonstration of consumer confidence in full effect. While housing is a somewhat pigeonholed factor, customer optimism and trust in the stability of their jobs, the security of their personal finances, and the overall quality (and longevity) of the economy all serve broaden the threshold of area of consideration, speaking volumes to both housing’s influence and reactivity.
That being said, the use of housing starts as an economic indicator is not without its drawbacks. It is, at times, an expression of incomplete data, drawing only from one specified area of the economy, despite the centrality of housing as contingent on other, more holistic economic sects. With a high rate of differentiation and modulation across different regions of the US, weather also takes a somewhat unexpected hold over the discriminate variability of housing starts in different areas of the country, as do the diverse range of sub-economies within these variant regions. A case can also be made for the oversight of this data, as it considers numeric statistical data without acknowledging quality and size of homes—another potential indicator of consumer confidence, given the fluctuant commitment of signing on to build a one story home in a development versus a privately contracted compound. However, while housing starts alone are inconclusive when considering the broader economic welfare of the country, they are an integral part of a cause-and-effect system, impacting employment, spending, loans and insurance, and indicating not only a general sense of the economy, but a more specific declaration of consumer assurance.
SOURCES
https://www.northerntrust.com/insights-research/detail?c=deafd74fb1792c12488100138c985da3
http://time.com/money/5202597/economic-indicator-housing-market-stocks/