What Investors Can Really Learn From Housing Market Data

Daniel Acker/Bloomberg
Daniel Acker/Bloomberg
Few economic indicators are more meaningful than the housing market. Buying a house, after all, is the ultimate sign of consumer confidence, and building a house is the first hint that suppliers are readying themselves for an economic upturn.

But housing market reports are also some of the most abused and manipulated data around. Given the huge role that the housing market plays in our lives, it's important to interpret the data about it correctly. So with two new housing reports released this week, let's take a rational look at what we can really learn from these elusive indicators.

Reading the Real Estate Tea Leaves

Dozens of housing reports have their brief moments in the headlines, but all can be whittled down to present and predicted supply and demand. Demand reports tell us who's buying, while supply tells us who's selling.

This week, investors got a taste of demand from the National Association of Home Builders/Wells Fargo Housing Market Index. The index surveys homebuilders on current sales, prospective buyer traffic and future sales expectations.

The latest report, which shows current sales continuing to increase, is typical of a slow and steady housing recovery. But it's the predictions that pack the real punch: Future sales expectations hit a five-year high -- a signal to investors that expendable income could keep markets moving higher in the months to come.

Housing chart 1
Author, data from NAHB.org

On the supply side, things look more complicated. A new Commerce Department report revealed this week that "housing starts" -- new construction projects -- dropped 16.5 percent for April:

new construction

But hidden in the same report was a hint of hope for wise investors. Although housing starts took a hit, housing permits for future construction increased 14.3 percent. That means that persistent demand may have finally built up enough to convince builders that buyers are back.

So Where Is Housing Actually Headed?

On the demand side, steady upticks in confidence surveys and home prices hint at a post-recession rise in consumer spending. These are the "first movers" of a recovering economy and can signal either (a) another bubble burst, or (b) a sustainable movement to economic improvement.

To decide which, we turn to supply. The supply side has lagged behind, put persistent demand seems to finally be wearing down home suppliers' wariness. Buyers are gobbling up existing homes as increased construction spending puts new homes on the market. "Supply squeeze" has been on the tip of housing analysts' tongues for most of 2013, and the next few months will be crucial to suppliers' decisions to match demand.

Housing Hints

There's a lot of manure in macro news, but housing data provides a clear hint at where the broader markets might be headed. While analysts have recently been making headlines warning about overpriced markets and ready-to-burst bubbles, in reality, increasing supply and spending point to a rational rise in housing and stock markets.

Wise up to macro scare tactics, seek out the best companies regardless of market movements, and you'll be well on your way to pulling sustainable profits for years to come. And with any luck, you may even find yourself in the market for a new house.

Motley Fool contributor Justin Loiseau owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our newsletter services free for 30 days.

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The housing market/real estate could be dead forever. Everything is just too expensive. A rooof for a small to average size home is 8 K, applinaces (excluding junk) are astronomic.
Homes offer privacy and a place to live. If people were not so damn greedy you could get builders to build 2,000 sq foot homes that would last 100 years at an affordable price. Nothing good is going to happen till people realize that they don't need a castle to survive and enjoy life.
When interest rates go up prices should come down,,,but in this market who knows. It is no ones fault that homes are under water except the fools who bought them

May 20 2013 at 2:47 PM Report abuse +1 rate up rate down Reply
1 reply to SPQR's comment

have to agree with a lot you say, but a roof for a small house is not $8K typically. I just ahd 3 roofs done in the last 3 years, A 1300sf house, $3,400, a 1650sf $4,200 and a 2450sf with upgraded shingles, $4900. Complete tear offs, etc.

May 20 2013 at 6:26 PM Report abuse rate up rate down Reply

Two words: "Spring market". Low interest rates are the only thing keeping prices artificially high right now. Once interest rates go up (eventually they have to), many people will not be able to sell their homes for what they paid. Prices will drop again and millions will go underwater. There are always people who HAVE to sell, because they are forced to go where the work is. Take a lesson and don't borrow money against your home to buy crap that you really don't need. Those giant homes with huge kitchens, media rooms, etc, might look cool to your friends, but the taxes and interest payments will put you even deeper in debt and will eventually eat you alive. Mortgages made sense many decades ago, when home buyers had to come up with at least a 20% down payment to qualify for a loan and loyal employees could work for the same company for 40 years and eventually pay off their 30 year mortgage. Those days are long gone. Everyone is out to make a fast buck and get rich quick like the tech start-up dweebs that will lose their fortunes just as fast when the next "big thing" comes along.

May 20 2013 at 2:17 PM Report abuse +1 rate up rate down Reply

builders know how to build not predit buying activity and tend to build if the bank gives the the money. The real inventory is huge and being kept off the market for if banks sold the houses for what they are keeping the value on their books they would go bust.
It is insane that the lenders are still giving 94% loans in these uncertain times.
It is now Government controled housing market and stock market and the ending is not going to be pretty.

May 20 2013 at 10:28 AM Report abuse +2 rate up rate down Reply
David Anderson

Some good comments. It will take several years to work through this inventory. I am sure the Fed is quite aware of this which means low interest rates for a long time.

May 20 2013 at 9:16 AM Report abuse +1 rate up rate down Reply

I'd like to add to my previous comment -- adding to the fact that foreclosures have increased over the last year in our area, there are several properties that have been VACANT for two to three years and longer where the owners abandoned them, and they are not even on the foreclosure list of our town -- YET... Shadow inventory for the future...

May 20 2013 at 8:48 AM Report abuse +1 rate up rate down Reply

There is a large shadow inventory of homes that have not been worked through the system yet... I know several families that are eager to sell their homes but are so underwater they haven't a hope... The foreclosures in our area are actually way up from last year, and the 'word' is that our neighborhood is strong and in demand -- in reality, it could not be further from the truth -- values are down -- our home is valued at 20% less than we paid in the 90's... Over 15 years of equity lost if we sold now -- not to mention the 30% down payment... If you take away the Fed's $85,000,000,000 bond-buying and the mortgage rates move up, you're facing another round of problems in housing -- the buyers of today have rock-bottom rates and low, low prices in their favor, but who is going to buy five years down the road??? What will be the incentive for those future buyers??? You don't hear much about job growth anymore, and the student loan debt is over $1 trillion and counting... Home ownership??? Only if subsidized....

May 20 2013 at 8:16 AM Report abuse rate up rate down Reply