ITR Experts Say: The US Housing Market is Bending

We sometimes refer to the US housing market as our "canary in the coal mine" for the broader US economy. The idiom refers to coal miners' early-20th century practice of bringing caged canaries into the depths of the mines to detect carbon monoxide and other toxic gases. The canaries were more sensitive to the gases and would succumb to them before the miners, their deaths serving as a warning for the humans to retreat. A somewhat morbid practice by current standards, but effective.

Today, unfortunately, our economic "canary" appears to be under duress and pointing to signs of danger for the 2019 US business cycle.

US Single Unit Housing Starts during the 12 months through October totaled 889.0 thousand units, up 6.0% from the corresponding 2017 period. This marks the most anemic annual pace of growth for the US housing market in nearly four years, and that pace continues to slow. The most recent monthly data indicates a trend of decay, as Starts in October 2018 alone fell 1.5% below the October 2017 level.

Other industry trends are painting a similarly bleak picture:

• The National Association of Home Builders Housing Market Index monthly reading, an effective measure of home-builder sentiment, was down 13.0% in November 2018 from the November 2017 level, the sharpest year-over-year drop since 2011.
• New US Home Sales, at 42.0 thousand in October, were down 14.3% from the October 2017 level, again the sharpest year-over-year contraction in monthly data since 2011.
• US Existing Home Sales are in recession, down 1.8% during the last 12 months, on average. Existing Sales in October alone, at 5.2 million units, were down 5.1% from October 2017.
• US Single Family Housing Permits, which have a short lead time to Starts, are sharply decelerating as well, suggesting that Starts are unlikely to reverse course in the near term.

The Single-Family Housing market serves as an economic "canary," or leading indicator, because it has historically started to fade in the face of economic headwinds before the US macroeconomy. In this cycle, the toxic gases appear to be rising mortgage rates, home-price inflation due to labor/land/material costs (impacting both housing affordability and builder profitability), and, more recently, waning confidence.

Negative pressures from rising interest rates, inflation, profitability challenges, and softening confidence coupled with rising uncertainty are hardly unique to the housing sector, but, faced with these factors, this sector is the first to wilt. We expect that these pressures will take a toll on the US economy next year.

It is time to acknowledge the canary and start implementing strategies to prepare for slowing growth next year.

Connor Lokar
Economist