On my first “Your Mind on Money” radio show on 89.1 The Lakeshore, I stated the housing market was so deeply damaged by the financial crisis it would not serve as a useful economic metric for five years.
The comment was made in early 2009, and while it seems like almost yesterday, a tumultuous five years has passed. Many of the underlying economic problems associated with the crisis appear healed, and the housing market has again become a closely followed indicator of our economic recovery. Housing is once again considered an engine of growth as opposed to a legacy of the deeply damaged 2008/2009 financial system.
In preparing to write the column earlier in the week, I was ready to address some of the red flags beings presented by the housing market.
Recent data indicated housing starts dropping 16 percent and existing home falling 5.1 percent in January. These are scary numbers. Were they a result of the recent 1 percent rise in mortgage rates? An early sign of a recession? Or perhaps the extremely stubborn polar vortex was to blame.
I wanted to build my case for the polar vortex, but even existing home sales in warmer markets had dropped, and it’s a stretch why someone in California would be holed up because of -12 temps here in the Midwest.
I waited for new home sales data to be released Wednesday, and expected red flag validation. Wall Street consensus expected new home sales at 400,000. I wouldn’t have been surprised to see something much lower. But when the data arrived it only added to the quandary. In all, 468,000 new home sales, a 9.8 percent growth rate and the most since pre-crisis 2008. How could we have two data points falling off the cliff and a third directly related one going through the roof?
My answer is speculative but based on logic. First, a data point. The inventory of existing homes is reduced by historical standards, which to me indicates much of the low hanging fruit of bargain price homes has been sopped up by investors and the most credit worthy buyers. Or in other words, if your home purchase was driven by desire (or a bargain) as opposed to need, chances are you’ve already made your purchase. Oh, and let’s be honest, it’s almost impossible to buy an existing home in polar vortex temps.
But new home sales are driven by something different: optimism. New home sales tend to be larger in scope and higher in price. Families only embark on a new home purchase when feeling confident. This continued growth in new home sales shows me families across American are feeling better about the future, which is good for all of us.
The silver lining is, new home sales contribute much more to our overall economy as well. New homes cannot be built in China, their construction provides good American jobs and because one of the hardest things is to put an old couch in a new house, the positive economic ripples from new home sales spread out nicely as well.