Breakout for the U.S. housing market?

May 27, 2016

When steering through an economic recovery that has been defined by fits and starts and lackluster performance, what everyone searches for are clear signs of a break from that trend.

It’s fair to say U.S. pending home sales in April blew the roof off.

Even the most optimistic forecast was more than a country mile short of the 5.1% rise in a key index measuring the number of contracts for houses soon to be sold.

US pending home sales

This sudden spike in the index to its highest in more than a decade is significant for several reasons.

First, throughout this entire recovery, a breakout of this magnitude in any set of data has been extremely rare.

But not only has this surge in pending home sales blown away all expectations, it’s taking place in a part of the economy that was the epicenter of the financial crisis, smoldering nearly a decade ago and then exploding into a financial fireball with the collapse of Lehman Brothers in September 2008.

Crucially, this is a major improvement in a measure of actual turnover in the housing market rather than an average asset price, which of course can fluctuate wildly based on very few transactions whether that be a house, a share, a bond, an exchange rate.

An increase in the number of homes changing hands is critical for economic growth because with each sale to a new buyer, large purchases necessarily follow: refrigerators, furniture, all sorts of other household goods and services.

It’s not only pending home sales that are looking a lot better. New home sales also jumped in April by their biggest amount in nearly a quarter century to an 8-year high.

US new home sales

When the financial crisis and the Great Recession took the U.S. economy in a choke-hold, many of the smartest thinkers at the time said the real measure of recovery would be when the housing market took off once again.

Looking at the chart, it is clear, on this measure at least, that housing activity since the crisis has been hesitant and fitful, despite more than half a decade of near-zero interest rates. It’s also clear the latest surge is more of the kind we saw when the market was booming before the financial crisis.

As ever, it would be foolish to take just one small set of data and extrapolate from that the state of an entire economy.

But policymakers at the Federal Reserve, who have been exceptionally vocal in the past few weeks about the prospect of another interest rate rise by July, will welcome these numbers.

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