What to Understand About This Morning’s ‘Good’ Housing Data

This morning, when housing starts and building permit numbers for August were released, the market seemed to collectively heave a sigh of relief. Dow futures were down more than two hundred points but clawed some of that back after starts came in at 1.575 million, up 12.2% from last month and significantly higher than the 1.44 million that analysts had forecasted.

That pop in stocks is understandable. After all, only people who have money and are confident about the future buy houses. So building statistics are usually seen as a decent measure of consumer confidence. However, when you put these numbers into context, what they are more than anything is a warning to traders and investors as to why you shouldn’t put too much stock in one data point.

There are reasons for the surge in housing starts that happened in August, and those reasons are firmly in the rear view mirror a month later. Last month saw a drop in mortgage rates that have now reversed.

The average 30-year mortgage rate had been climbing throughout the year after starting 2022 at around 3%. The Fed was raising rates and mortgages inevitably followed until, by mid-June, they were nudging 6%. That was supposed to slow the hot housing market that had been one of the primary contributors to inflation, but as I pointed out last month, while the hikes did slow the rate of increase in house prices, they didn’t result in any dramatic drop.

That is, at least in part, because the house price increases we saw weren’t caused by a surge in demand, but rather by weak supply. There were global shortages of raw materials and an acute labor shortage in America, meaning homebuilders couldn’t build faster even if they wanted to. Rate hikes discouraged demand enough to put the brakes on a hot housing market, but with supply still restricted, they didn’t kill demand.

Then, early in the summer, traders, who are presumably mostly too young to remember the impact and stickiness of an inflationary cycle, somehow convinced themselves that a couple of 75 basis point hikes would take care of inflation running at over 8%. Stocks rallied off their lows and mortgage rates started to pull back.

Put yourself in the position of a potential homebuyer in that environment. You have seen mortgage rates jump while house prices continue to rise, then rates drop back to more affordable levels. That is a strong motivation to get yourself into a homebuilder’s showroom and sign on the dotted line. That is what happened in August. The market was deluding itself about inflation, causing mortgage rates to drop to around 4%, but home prices were basically holding steady. A surge of pent-up demand was inevitable.

So, what this morning’s data actually showed was not a jump in demand for housing based on confident consumers but rather a temporary, FOMO-driven jump in demand that was met with a commensurate increase in supply. That shows a housing market that is coming back into balance after a few years of supply issues, but nothing else. It suggests that housing prices could hold up quite well as the Fed continues pushing rates higher, which is certainly good news for homeowners, but that is primarily because of continued supply issues, not strong and growing demand.

This is a lesson in why investors should not put too much faith in one data point. Higher than expected housing starts may look like a positive on the surface but they really say nothing about the confidence of buyers in August. It was a unique month with conditions that favored a pop in demand. However, with mortgage rates climbing back to above 6%, that will reverse quickly. That is why the initial positive market reaction to the numbers in futures lasted less than half an hour. As I write, we are headed lower again, and even lower still is the most likely course for a while, despite a “positive” housing starts number.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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