The Housing Market is Waving A Red Flag

Housing Starts

Housing starts measures the number of new residential units where construction has begun. They serve as a good barometer for the economy's health, as it's a hub, and activity will filter through to various sectors, including plumbers, electricians and carpenters, as well as more macro levels such as local tax revenue etc. Moreover, construction work tends to be well remunerated; therefore, consumption will be affected too. Completed houses will need to be furnished etc.

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Housing starts (HOUST) have dipped below their 12-month simple moving average (SMA), and the SMA has bearishly turned down (red arrow). Its RSI has fallen below 50, which is the weak side of the oscillator (green rectangle) for the first time since the lockdown period in 2020.

Housing permits (PERMIT) also show signs of deterioration. This series is also below its 12-month SMA, but the SMA is yet to turn down. If it does, it will be considered a negative development. However, its RSI is below 50 (blue rectangle), confirming weakness. The longer it stays on this side of 50, the more decline the series will likely show.

Existing Home Sales

Notwithstanding that the methodology of calculation differs between the two series, the existing home sales market is much larger than that for new home sales. For example, consider the current print for existing homes sales on a seasonally adjusted annual basis is 5.12m vs 696K for new homes sales.

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Given its size and importance, the existing home sales (USEHS) chart is concerning. The series is below its three-month moving average, and the SMA is moving down. Moreover, its RSI is below 50 and weak.

Existing home sales boost the local economy where the sale concludes. Many of these homes get touched up in some capacity, e.g., a new paint job, retiling of roof etc. Moreover, most new homeowners will also buy appliances and household durables. Thus, the decline here reverberates into other sectors.

NAHB/Wells Fargo Housing Market Index (HMI)

The HMI is a diffusion index based on a monthly survey of NAHB members. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

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The HMI (USHMI) is below its three-month moving average, and the SMA is pointing down. Its RSI is well established below 50, confirming the weakness implied by the series. Given the decline in the HMI, we can infer that either current market conditions are poor, conditions over the next six months will be poor, or that walk-in traffic is declining. Of course, it may be a combination of all three.

Mortgages, Unemployment and Refinancing

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The housing sector is sensitive to mortgage rates and unemployment. In this regard, we can see that the sharp increase in the mortgage rate (MORTGAGE30US) to 5.351% certainly has played a role. The rate is comfortably above its three-month moving average, with the SMA trending upwards.

The unemployment situation is murkier. In a worrying sign, initial jobless claims (ICSA) are increasing, with the series above its three-month moving average. Usually, this translates into higher continuing jobless claims (USCJC).

However, this is not the case. Instead, continuing claims remain below their three-month SMA (red arrow), with the SMA still pointing down. In this vein, the current correlation coefficient between initial and jobless claims is -0.66 (red rectangle). This relationship needs to be observed for deterioration or improvement, as the negative correlation cannot persist indefinitely.

However, the breakdown in housing may suggest that job security is starting to become a worry.

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The MBA mortgage application survey (USMMI - left) has dropped to levels last seen in 2000. Moreover, refinancing (USMRI - right) has also plummeted to multi-decade lows. I.e., people are reluctant to take out a mortgage and see no point in refinancing current mortgages at higher rates.

Conclusion

There are two major worries regarding the housing market. Firstly, house prices are still high. However, if the weakness filters down to the decimation of housing prices, a negative wealth effect will add headwinds to the economy. Secondly, the soft supply-side activity is rippling through to other sectors, adding to general economic concerns.