Friday, July 20, 2018

Has Housing Market Activity Peaked?

by Bill McBride on 7/20/2018 08:43:00 AM

Following the release of housing starts this week, Sharon Nunn wrote in the WSJ: Housing Market Stumbles at the Beginning of Summer. She quoted Ian Shepherdson, chief economist at Pantheon Macroeconomics as telling clients: “Housing market activity – sales and construction – likely has peaked for this cycle."

If correct, that would be significant for the economy.

First, I think it is likely that existing home sales will move more sideways going forward. However it is important to remember that new home sales are more important for jobs and the economy than existing home sales. Since existing sales are existing stock, the only direct contribution to GDP is the broker's commission. There is usually some additional spending with an existing home purchase - new furniture, etc. - but overall the economic impact is small compared to a new home sale.

Also I think the growth in multi-family starts is behind us, and that multi-family starts peaked in June 2015. See: Comments on June Housing Starts

For the economy, what we should be focused on are single family starts and new home sales. As I noted in Investment and Recessions "New Home Sales appears to be an excellent leading indicator, and currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight."

If new home sales and single family starts have peaked that would be a significant warning sign.   Although housing is under pressure from policy (negative impact from tax, immigration and trade policies), I do not think housing has peaked, and I think new home sales and single family starts will increase further over the next couple of years.