Housing Prices Headed Up?

Let’s look at the housing market. It’s important for housing prices to increase in a steady manner to help people’s net worth improve. As we’ve discussed, savings rates are down and real earnings growth has been stagnant for non-supervisors. The wealth effect might just be all we have to keep the economy going. I don’t have a sensitivity analysis to show the exact effect asset prices have on the consumer, but consumer spending would be lower if stocks were down 10% instead of where they are now year to date. It’s the same with housing. The economy doesn’t rely on housing the way it did in 2005, but it’s still important. Luckily, the chart below indicates the price of housing will continue to increase because lumber futures are up. As you can see, the lumber futures have been a great predictor of the Case-Shiller 20 city price index. The lumber prices fell before the housing bust and rose before the recovery started. There was a false alarm in 2014-2015 as lumber prices fell along with the other commodities.

Consumer Confidence Explodes

The chart below shows the consumer confidence compared with the household debt service ratio. As you can see, the consumer confidence survey tends to peak right before recessions. I don’t necessarily think another recession is coming just because confidence is high. We’re in an unusually long business cycle. I expect the expansion to last at least another year. However, the important point to recognize is the high consumer confidence index doesn’t mean the economy is about to see amazing growth. The chart shows the household debt service ratio is diverging from the confidence survey this cycle. That’s because the debt taken out via mortgages hasn’t rebounded like other debt has.

To be clear, on Tuesday the consumer confidence indicator showed a 125.9 reading. That was above the consensus of 121.0, above the prior reading of 119.8, and above the highest estimate which was 122.9. This report was a 17 year high. The key improvement in this survey was from the labor market where only 17.5% of respondents said jobs were hard to get. This is a good sign for the labor report on Friday. There was also a high amount of optimism on the stock market as 42.1% were bullish and 23.2% were bearish.