U.S. Housing on Growth Trajectory, Economy Shows Strength

Nothing seems to bother the U.S. housing market these days – not the recent stock market turbulence, instability in China nor concerns about the Federal Reserves’ rate hike expected in the coming months. Home sales are rebounding, builder sentiments are near to decade highs, and consumer confidence is at a seven-month high.

“It is hard to make the case that the stock-market mess has anything to do with the U.S. economy as the data are all pointing to solid growth,” said Joel Naroff, chief economist of Naroff Economic Advisors.

New-home sales, which form 8.3% of the market, rebounded in July. Home resales jumped to a near eight-and-a-half-year high in July while groundbreaking on new home building climbed to its highest level since October 2007.

Solid job growth is boosting confidence among Americans and encouraging young adults to move into homes of their own. New home sales rose 5.4% over the previous month and 25.8% a year earlier to a seasonally adjusted annual rate of 507,000 units, the U.S. Department of Commerce reported this week.

New home sales rose in three of the four U.S. regions last month, touching a 14-month high in the Northeast. Home inventories increased 1.9% to 218,000 last month, the highest level since March 2010.

However, supply still remains less than half of the pre-crisis levels in July 2005 of 1.4mn. At July’s sales pace, it would take 5.2 months to clear the supply of houses on the market, down from 5.3 months in June.

Housing is expected to contribute to the GDP this year, but remains constrained by a persistent shortage of homes available for sale. According to the S&P/Case Shiller Home Price Index, a composite index of 20 metropolitan areas gained 5% year-over-year in June as compared to a gain of 4.9% in May. Denver, San Francisco, and Dallas experienced the biggest year-over-year home appreciation among the 20 cities, with price increases of 10.2%, 9.5% and 8.2%, respectively.

Further, consumer confidence rose to its highest level in August since January, reflecting optimism about an improving labor market with nearly five years of steady job creation. The Conference Board, a private research group, said on Tuesday that its index of consumer confidence rose to 101.5 in August, bouncing back after a steep decline in July(91). That survey was, however conducted before a global equity markets sell-off that began last week, which has diminished the chances of a Fed rate hike next month.

Chances are that consumer sentiment could retreat in September as a strong labor market, lower gasoline prices and an improving housing market also are seen supporting consumer confidence. A sustained upbeat sentiment would further trigger consumer spending, which accounts for more than two-thirds of U.S. economic output, and an overall economic recovery.

Is the Growth Sustainable?

The recovery in the housing sector is primarily driven by a tight labor market, which continues to improve. The growth in housing is further supported by the rising rentals in major cities.

Potential buyers are also eager to lock in mortgages before interest rates rise, which would make mortgages more expensive. Other data this week showed moderate gains in house prices in June, which should boost consumer spending and keep home purchasing affordable, especially for first-time buyers. “If the pace of appreciation stabilizes around current levels, it could provide enough incentive to encourage homeowners to put their homes on the market, while encouraging potential homebuyers back into the market,” said Lewis Alexander, chief economist at Nomura in New York.

All this said, consumers could be wary of the slowdown in China and the losses at the Wall Street which could weigh on consumer confidence in the coming months. Demand from high-end home buyers has already come down in Denver, as buyers are increasingly concerned about the the stock market and the global economy.