Recent economic indicators suggest that the state of the housing industry remains strong and that the sector may be emerging as the new driver of the U.S. economy.
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Roland Czerniawski: The housing market is positioning itself as the new cornerstone of the economic recovery. This week's four major data releases pointed to sustained strength in the housing industry, suggesting that the housing momentum continues. Builder sentiment rose in October, while housing starts and permits continued to grow at a healthy rate. Additionally, existing-home prices appeared to be under control, and existing-home sales surged to the highest level since the recovery began.
Let's begin with the builder sentiment, which is sometimes referred to as the Housing Market Index. The most recent index reading for October was the highest since November 2005, suggesting that builders are feeling increasingly more optimistic about the state of the housing industry. Two building blocks of the index, current sales and sales six months from now, were particularly strong, increasing by three and seven points, respectively. Such optimism among homebuilders is certainly encouraging.
Secondly, another construction-related data release was the New Residential Construction report, which suggested that both starts and permits continued to grow at healthy rates. Permits came in at 1.1 million, below the consensus expectations, while starts increased to 1.2 million, exceeding nearly all expectations. Year-over-year, single-family starts, which are an important driver of economic growth, increased at a robust rate of 14.1%, when averaged for three months. Single-family permits growth, which is just as important, was 7.2% on the same basis. There was a noticeable spike in multifamily permits in June, related to expiring developer tax laws in the New York City area, and now it appears that multifamily permits converged to the trend line. Overall, starts and permits data suggests continued strength in the construction industry. Last year, starts grew 9% overall, and so far based on the data available in 2015, they are on track for a faster double-digit growth.
Moving to the existing-home portion of the housing market, FHFA has released the latest data on home prices. According to the data, prices of existing homes advanced 0.3% in August, or 5.6% on a year-over-year three-month average basis, indicating that the pace of home-price growth is now slightly slower than what we had experienced in the past four months. This is another piece of good news, as price growth that is too high tends to hurt the economy. With the current "Goldilocks" pace of growth, home prices continue to benefit existing-home owners without ruining affordability for prospective buyers.
Another piece of data on the state of the existing-home market was existing-home sales and inventories. Existing-home sales surged in September to the highest level of the recovery, at 5.55 million units annualized. The year-over-year three-month average growth stood at 8.3%, suggesting continued strength in the existing-home market as well. The demand for existing homes remains strong, and this is reflected in the low inventory levels that have been depleting for four consecutive months now. While existing-home sales remain strong, the low inventory levels could potentially limit sales in the long run, and it will be an issue that we'll continue to monitor closely. Nonetheless, existing-home sales are growing at a high single-digit rate based on the data released so far in 2015, which is good news considering that the existing-home market actually contracted 3.1% in 2014.
Overall, the recent economic indicators suggest that the state of the housing industry remains strong, and that consumers continue to be confident about their long-term finances. With the recent manufacturing and mining slowdown, housing is now positioning itself as the new driver of the recovery, and investors should watch this sector of the economy very closely in the next months.
