Home Sweet Home or Troubling Toothache?

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According to the NAHB (National Association of Home Builders), housing contributes 12‒15% to U.S. GDP. The actual construction and remodeling of single and multifamily homes account for 3‒5% and the remainder is comprised of the associated consumption of housing services including rent and utilities. In addition, housing is usually a consumer’s biggest asset. Thus, any cracks in the housing market’s foundation are valid reasons for concern.

Limited inventory, high prices and rising interest rates contributed to an overall slowdown in housing sales in 2018. According to the S&P Case Shiller index, housing prices rose at a 4.7% annual pace in December, much higher than the pace of inflation. January new home sales dropped 7% from December and 4.1% from a year ago; not a very encouraging start to 2019. Still, housing starts which are considered a leading indicator, rebounded sharply – up 18.6% in January to an annual pace of 1.23 million. (To give this number some context, housing starts hovered around 2.3 million in 2006).

New construction leads to economic activity: jobs, loans and consumer spending. Mortgage rates recently fell to their lowest levels in a year, which may encourage sidelined buyers to jump in and boost sales. Housing is not as big a driver of the economy as it was pre-recession, but it certainly factors significantly into economic growth. Given limited inventory, increases in population and household formation, and a continued robust economic backdrop, housing prices should keep moving higher in 2019, but at a measured rate.

Please watch housing starts on page 67 of the Global Perspectives Book.

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