Wednesday, February 24, 2010

Housing: The Best Leading Indicator for the Economy

by Bill McBride on 2/24/2010 02:24:00 PM

Historically the best leading indicator for the economy (and employment) has been housing. I've been writing about this for years. For a great summary paper, see Professor Leamer's presentation from the 2007 Jackson Hole Symposium: Housing and the Business Cycle

For housing as a leading indicator, I use Residential Investment (quarterly from the BEA's GDP report), and monthly data on Housing Starts and New Home sales from the Census Bureau, and builder confidence from the NAHB.

Two key points:

  • Existing home sales is not a leading indicator (sales of existing homes does not add to the housing stock).
  • This time could be different - the recovery could be led by exports and technology - but I'll stick with housing.

    So here is a review of the three monthly leading indicators:

    Housing Starts

    Total Housing Starts and Single Family Housing Starts Click on graph for larger image in new window.

    Total housing starts were at 591 thousand (SAAR) in January, up 2.8% from the revised December rate, and up 24% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Total starts had rebounded to 590 thousand in June, and have moved mostly sideways for eight months.

    Single-family starts were at 484 thousand (SAAR) in January, up 1.5% from the revised December rate, and 36% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for eight months.

    Housing starts are moving sideways ...

    Builder Confidence

    Residential NAHB Housing Market Index This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

    The housing market index (HMI) was at 17 in February. This is an increase from 15 in January.

    The record low was 8 set in January 2009. This is still very low - and this is what I've expected - a long period of builder depression. The HMI has been in the 15 to 19 range since May 2009.

    More moving sideways ...

    Note: any number under 50 indicates that more builders view sales conditions as poor than good.

    New Home Sales

    New Home Sales and Recessions The Census Bureau reports This graph shows New Home Sales vs. recessions for the last 45 years.

    New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the 348 thousand rate in December.

    And it would be generous to even call this "moving sideways".

    So these leading indicators suggest any growth will be sluggish and choppy.

    Now some people might argue that housing starts and new home sales are about to increase sharply. Based on what? That seems unlikely with the large number of excess housing units (new and existing homes and rental units). See: Housing Stock and Flow

    As I noted above, it might be different this time with exports and technology leading the way, but I'll stick with housing as a business cycle indicator.