(06/25/14) Housing: An Economic Warning?

Over the past few years, the rebound in housing has been a strong tailwind for the economy coming out of the 2008-09 financial crisis, explains Jim Stack, editor of InvesTech Market Analyst.

However, it’s now clear that with home prices rebounding, sales falling, and lending remaining tight, that tailwind is fading.

If these recent trends continue, housing could turn into an economic headwind moving forward. Here are key areas to watch:

The biggest positive for the housing industry is that excess inventory from the 2007 housing bubble has been dissipated—particularly in the oversupply of new homes.
Building permits and housing starts are in a solid uptrend, and at, or near, new recovery highs. Yet levels still remain weak by historical comparison.
After gaining solid ground from 2011-13, existing home sales have been falling over the past nine months, and new home sales have leveled off at historically depressed levels.
A rebound in home prices and last year’s jump in mortgage rates are starting to make homes less attractive (and less affordable) for many buyers.
Traffic of prospective home buyers and homebuilder confidence has weakened decisively since the start of the year.
Our InvesTech Housing Bellwether Index confirms that the housing recovery has stalled…at least for now.

It’s truly remarkable how far the existing home and new home inventories have been reduced since the housing bubble peaked in 2005-07!

While inventories have been rising over the past two years (existing home inventories jumped 18.2% in April), they remain below their long-term averages.

Existing home sales have fallen -13.6% from July of last year, and new home sales have leveled off at a depressed level—more consistent with past recession lows.

If these sales statistics fail to rebound in coming months and instead resume declining, then it could prove ominous for the US economy. Note that most recessions are preceded by falling home sales.

One culprit behind the slipping home sales has been the rebound in home prices; the rebound might be helpful to the 18.8% of US homeowners who are still underwater on their mortgage, but it makes homes less affordable for new homebuyers. Further increases will provide negative headwinds to the housing market.

Mortgage rates are still low in comparison to pre-financial crisis years, mortgage rates could inevitably prove to be the Achilles heel of the housing sector when, not if, bond yields start rising.

Bottom line, the housing sector is at a critical crossroads and the outcome of these key indicators in the months ahead could determine whether or not housing drags the economy toward the next recession.