US Housing market – general health, trend and implications to the overall economy

Consumer spending accounts for 70% of the US economy. Homes and Cars/Auto are the biggest ticket items that consumers spend their money on. Unlike other purchases that may use money earned in the last paycheck, the money spent on Homes and Auto are from loans and mortgages that are borrowed from the future 3 to 30 years. Therefore Housing and Auto spending has immense impact on the economy – in both directions, up and down. This was very evident in the 2003-2004 recovery after the tech bubble burst and then during the meltdown into 2008-2009 recession.

In this post, let’s take a peek at how the Housing spending is ensuing.

The first chart below shows the variation of nationwide Housing price with respect to Affordability and new private housing starts. Affordability of 100 implies that the median income family has just enough money to buy a median price home in the country.

The second chart below shows how 3 key housing indicators vary with interest rates. They are:

  1. House prices (Median in green, Average in orange), 
  2. Inventory (as monthly supply of homes in blue) and 
  3. Number of days houses are on the market (as median number of months on sales market for newly completed homes) 

All these housing indicators vary with respect to interest rates (10 year treasury as a representative for 30 year FRM and other ARM loans) in the chart below.

The next chart below shows how

  1. Private residential construction spending (in blue diamond)
  2. S&P Case-Shiller 20 city home price index
  3. Housing Affordability Index

vary with interest rates. I have chosen 30 year conventional mortgage rate to represent the interest rate here.

The chart below shows how the Real disposable personal income and Housing affordability index are varying with respect to year ago change. You might see some early warning signs in the percent-change-from-year-ago charts.

Finally, keep an eye on health of housing by checking how the market is pricing the Home builders ETF, XHB in relation to the S&P 500.

Be a prepared investor:

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