In this weekend update, we look at housing data and interest rates.
This past week building permits and housing starts reported. Building permits report is the annualized number of new residential building permits issued during the previous month. Housing starts report is the annualized number of new residential buildings that began construction during the previous month. This is the highest level since pre-2008 recession, specifically; it is the highest level since July 2007. The housing starts number is the highest level since September 2007. We would expect housing starts to lag building permits.
The housing market is a strong indication of the strength of the economy. Houses are a representation of consumer wealth, income and confidence. Consumers account for 65% of the Gross Domestic Product (GDP) and when things get tight or credit card debt gets high, they refinance their homes and pull equity out and continue to spend. When housing is doing well, home prices are rising and this is easy to do. When housing is slowing down or interest rates are too high and keep consumers from refinancing, consumer purchases slow down and in turn so do the equity markets and the economy.
In December 2016 interest rates rose. Due to higher interest rates, the costs of new home construction went up. The higher costs moved demand down. In January and February of 2017 building permits missed expectations. Similarly housing starts missed expectations. This dip in building permits and housing starts, the sentiment or risk appetites fell. This response saw higher volatility and in turn, U.S. equities fell approximately 4% from the previous month’s high.
This past month interest rates have pushed to 4 ½ year highs and very close to the same rates in December of 2016. If we see similar interest rates, we could see a similar drop in building permits, home starts, and equities in March and April. If rates rollover and drop, then we will expect to see the confidence continue to hold real estate do well and keep equities relatively high.