Economic SnapChart: Housing
By Chris Evers
Amid global uncertainty, housing is an important gauge of the U.S. economy. From direct investments in construction to rental payments and utilities, housing accounts for about one-sixth of U.S. economic activity. The recovery from the housing market crash has been slow, but housing prices have hit record highs eight months in a row.
The explanation is Economics 101 – supply and demand:
- Supply: Construction of new single-family housing has remained below the 50-year average pace since the middle of 2007. Currently, the rate of new starts is about 25% below the all-time average.
- Demand: Historically low mortgage rates have supported greater demand for existing houses. Pending sales are back to pre-recession levels and reached a 10-year high in April.
Rising home prices contribute to what economists call the wealth effect. As Americans see the value in their houses increase, they become more likely to increase consumer spending, which accounts for over two-thirds of the U.S. gross domestic product.
Landaas & Company provides this occasional glance at a current economic trend to help keep investors informed on some of the factors that can affect financial markets.
However, some economists worry that rising home values can price some prospective home buyers out of the market. In addition, factors including demographics and student loan debt have forced the home ownership rate down to its lowest level in 50 years.
For equity investors, rising house prices and low housing stock have boosted returns for U.S. real estate. Real Estate Investment Trusts (REITs) have outperformed stocks since the bull market began in early 2009. The FTSE NAREIT Equity REIT index grew by 24.3% a year in that time, vs. 18.2% for the S&P 500 index.
- New residential construction, U.S. Census Bureau and U.S. Department of Housing and Urban Development
- Pending home sales, National Association of Realtors
- U.S. House Price Index Report, Federal Housing Finance Agency
Chris Evers is a registered representative and associate at Landaas & Company.
(initially posted Aug. 24, 2016)