Housing on the Rebound

How Housing Market Strength Affects Investors and Consumers

Housing on the Rebound
September 8, 2014

The Great Recession of 2008-2009 constituted the worst economic downturn in the U.S. since the Great Depression of the 1930s. There were many factors that led to the financial crisis and subsequent recession, but undoubtedly, one of the biggest was the collapse of the residential housing market.

It has taken more than five years, but the housing market is finally regaining health in many areas of the country. June represented the third straight month of gains in U.S. home sales, with home re-sales hitting an eight-month high, according to the National Association of Realtors. The median house price in June rose to its highest level since 2007, before the real estate crash.

Impact on the Economy

Economists pay close attention to the state of the housing market because this tends to affect greatly the broad economy as a whole. When the housing market is healthy — when new homes are being built, young people are buying first homes, and existing homeowners are selling to move up to larger and more expensive homes — this has a trickle-down effect on many other sectors of the economy.

Of course, all the industries that are directly involved in home building receive a boost — construction and contracting firms, carpenters, electricians, HVAC companies, carpet manufacturers, concrete and timber companies, etc. But the impact of housing spreads to many other related industries as well, including furniture and appliance manufacturers and retailers, real estate agents and lawyers, banks and financial institutions, trucking and transportation companies, and rental property owners, to name just a few.

The National Association of Home Builders has estimated that the construction of one new single-family home results in the creation of three new full-time jobs paying total wages and compensation of more than $162,000. In addition, it results in profits of more than $57,000 for corporations and $61,000 for proprietors, or total combined wages and profits of more than $280,000.

These figures only represent the impact of a new home’s construction on the businesses and industries that are directly involved. They do not take into account the trickle-down effect on other industries like those listed above.

Impact on Investors and Consumers

In general, as the housing market goes, so goes the national economy. Therefore, with the housing market showing signs of renewed and perhaps enduring strength, some economists believe that this could lead to stronger economic growth in the U.S. for the remainder of this year and into next year.

What does this mean for investors and consumers? Housing market strength does not directly correlate to strength in the broad stock market, but to the extent that it strengthens the economy, it will usually tend to lift the stock market as well. Of course, a strong housing market does tend to favor the stocks of companies that are involved directly or indirectly in home construction. Therefore, it might be smart for investors to take a close look now at the stocks of companies in industries like those noted above for good buying opportunities.

From a consumer perspective, the most obvious impact of a strengthening housing market is higher-priced homes. It is important to remember that trends in home prices vary tremendously in different areas of the country and at different price points, so home prices could be rising, stagnant or even still falling depending on where and in what price range buyers are looking.

One thing to keep a close eye on over the next one to two years is what happens to mortgage interest rates. Right now, rates remain near historic lows, which is one of the factors that are fueling the strong housing market. However, the Federal Reserve has made it clear that it is not a matter of if, but when it starts to raise interest rates.

Another wild card is the impact downsizing by retiring Baby Boomers will have on the broader market over the next decade. If huge numbers of Boomers flood the market with their larger homes, the market value of these homes may take a sizeable hit.

It will be interesting to see how rising mortgage interest rates and boomer downsizing in the upcoming years will affect the strength of the housing market — and subsequently, its impact on investors and consumers.

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