Checking the Pulse of the Housing Market
By: Christopher Mistal
June 23, 2015
Today’s new-home sales data release wrapped up this month’s primary housing data. The report showed new-home sales accelerated 2.2% over revised April figures and were a whopping 19.5% higher this May than last May. On a seasonally adjusted annualized rate (SAAR), sales were 546,000 which handily bested the consensus for 525,000. The region with the biggest jump in sales on a percentage basis was the Northeast, leaping a staggering 87.5%. But before getting too excited, Northeast sales were just 30,000 (SAAR) up from 16,000 the previous month. 
Today’s report capped a seemingly solid month for the housing market. Existing home sales were reported up 9.2% year-over-year yesterday. Housing starts were 5.1% above May 2014 levels and the NAHB Housing Market Index jumped 5 points to 59. All of this positive data seems to suggest that the housing market must be back on track. Let’s take a closer look at each over the past 30 years and see.
Existing Home Sales
Existing home sales are the single most important piece of data that affects individuals. It is a measure of the ease in which one can buy and sell a house and reflects relative value that your house has. The massive crescendo in 2006 is indicative of just how out of whack the market got. Not only were people buying houses that they shouldn’t, but individuals were obviously flipping houses for a quick buck. When seven million houses were changing hands each year in 2005, double the number in 1995 it was obvious something wasn’t right. 
As you can see from the chart existing home sales were a relatively stable number until 1996, but quickly doubled by the peak in late 2005. There were swings, but relatively minor before 1996. After all, a family home is a long term investment, right? Existing home sales were nearly cut in half from the peak to the final, post-tax-credit low in summer of 2010. From that low, existing home sales have steadily risen (with the exception of the second half of 2013 when interest rates briefly began rising) to 5.35 million units on a seasonally adjusted annualized rate as of May 2015. At the current rate existing home sales are comfortably above the long-term average of 4.43 million.
However, there is one major concern, interest rates. Based upon 2013 data, the last time mortgage rates made a swift meaningful move higher, existing  home sales are highly likely to take a substantial hit when (if?) rates move higher as forecast. When rates rose approximately 1% in 2013, existing home sales slumped nearly 15% in a matter of just months. If you are considering an existing home sale, now may be a good time to put your house on the market. As far as buying goes, it is still a coin toss. You could get a great mortgage rate now, but your house could be cheaper after rates rise and sales slow.
[Existing Sales Chart]
Housing Starts
Housing starts are indicative of how builders feel about the housing market and are important for two reasons. First, home building provides a lot of jobs. When new home building sours whole construction crews are out of work. 
Second, housing starts are a leading indicator of the amount of risk that the market is willing to take. In a good market, home builders ramp up construction in anticipation of future sales. When the market turns they quickly reign in their plans. As you can see from the chart, from the housing bottom in 1991 to the top in 2006, housing starts jumped from under 800k to over 2.27 million on an annualized basis, a number never before reached in the fifty years that the Census Bureau has been compiling data. 
From the top, the number of housing starts crumbled all the way below 500k in early 2009. Weak demand and tight credit triggered the collapse. Credit conditions have eased and demand has improved which has restored some builder confidence. Housing starts have since doubled from their lows, but confidence appears to be waning as month-to-month numbers have become quite volatile over the past two years. Double-digit month-over-month and year-over-year percent changes do make good headlines, but it does appear as though some builders are beginning to worry about interest rates. With housing starts currently running well below average (black-dashed line), it appears builders still have a long way to go before they are ready to fully commit.
[Housing Starts Chart]
New Home Sales
It takes longer to build a house than sell a house, resulting in a buildup of inventory. Homebuilders attempt to strike a balance and plan their new construction accordingly. As you can see from the chart, new home sales fell off of a cliff down over 80% from their 2005 high to their 2011 low. Here again we see steady improvement since the lows, but still well below the longer-term average. A falling home ownership rate and lower household creation rate are keeping the market for a new home relatively depressed. Fewer new home buyers mean fewer housing starts and fewer new home sales. This cycle is not likely to be broken until household creation improves which is something very few expect to change anytime soon. 
[New Home Sales Chart]
NAHB Housing Market Index
The NAHB Housing Market Index (HMI) is, in our opinion, the best indicator for judging the overall health of the housing market. The HMI was ahead of the curve in forecasting the imminent demise of the market. From 2005 to 2006, the HMI leveled off and turned down well before the other data began to crumble. The HMI will also convey any optimism within the industry before the data confirms a recovery. Numbers above 50 are a positive bias, below is negative. The index is currently at 59 as of this month. This matches its high from last year and is the highest level going back to 2005.
Digging a bit deeper into this composite index does reveal even more. The South and West regions of the U.S. continue to be the brightest locations while the Northeast is the sole drag. Perhaps it is the climate or perhaps it’s the high-tax nature of the location that is keeping the housing marker subdued here. One area of concern though exists; potential buyer traffic is still under 50 at 44. Worse yet, this is the highest reading of the year. Without buyers how much lower will it be before the rest of the index begins to decline? After all, it is the buyer that makes the market.
[HMI Chart]
Although recent housing market data has shown some positive signs, it will likely be decades, if ever, before we see numbers like those from 2005. The housing market crash and ensuing near global financial system meltdown has resulted in significant, and most likely, long-lasting change. For starters lending standards have (re-) tightened making it more challenging for first-time buyers which there are fewer because children are living with mom and/or dad longer. Then even after they move out, renting instead of buying as they are waiting longer to get married and settle down. Foreign and investment buyers have stepped up their purchases, but only in select markets and locations. So much like the broader U.S. economy, the housing market has made substantial progress since the crisis, but remains broadly sub-par once all the hot-spots are averaged into the rest of the data.