US Housing Sector Signals Could Precede Equity Losses

Market Trends - 24/05/2017

With US equity benchmarks trending not far from record highs, investor sentiment continues to remain bullish despite the inherent economic and political risks that lie ahead.  Amid an administration hamstrung by scandals and unable to push through vital legislation to the rapidly downshifting housing market, multiple factors are looming large over financial markets.  The most acute concern is the recent deceleration in key housing market fundamentals.

Building permits and housing starts figures published last week by the US Census Bureau showed that both figures dipped dramatically during the month of April, falling -2.50% and -2.60% respectively while retreating below the prior month’s figures.  These results contrasted sharply with expectations that both numbers would rise.  When combined with the latest new home sales data released yesterday, there are growing indications that activity in the housing sector has peaked for the cycle.  Although a notoriously volatile figure, sales of new, single family homes fell by -11.40% on a seasonally adjusted annualized basis.

In general, the housing market is a strong leading indicator of economic fundamentals.  The best parallel example would be the robust housing fundamentals in the lead up to the last financial crisis of 2008-2009.  A look back at the historical data for many of these figures shows that many of these data points peaked back in 2005-2007.  The evidence of this comes from the same pre-crisis period that saw housing fundamentals begin to falter just ahead of the equity valuation highs recorded back in 2007.

Looking ahead, should existing home sales data due later in the session follow a similar pattern, it could be an early signal that the bullish cycle dominating the post-crisis years is finally reaching a peak, and is potentially on the verge of fading.  While equities may continue to move higher over the near-term, another record close could nevertheless be misleading, and should be treated with the utmost caution.  Although higher momentum has been slow and steady recently, falling trading volumes could indicate an approaching reversal for Dow futures.

 

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