Last week’s national housing starts and permits report is the best economic news in a long time. Why? Because housing always leads the economy, and the direction of that lead lasts a year or two into the future. And at this point, the positive trend in housing construction is strongly established.
The most important measure of housing construction isn’t how much of a recovery there has been relative to the last peak, but how many additional houses are being built now compared with the last measurement period. For example, going from 0 to 200,000 new houses in a year adds just as much new employment as going from 2,000,000 to 2,200,000 new houses. The same amount of new construction workers are needed to build those 200,000 additional houses, the same amount of appliances and furniture will be bought to fill them, etc.
This isn’t just theory; it’s backed up by the data. Here are some graphs to drive the point home. First, here is a graph of the year over year change in the number of houses built (blue) vs. the year over year percentage change in GDP since 1983 (red).
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For every 200,000 additional houses built, GDP consistently increases over trend by 1%, with a variable lead time of several quarters to several years. Of course, GDP growth is an imperfect measure of workers’ economic well-being. What the next graph shows is that GDP growth (red) consistently leads job growth (black).
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Because increased housing construction consistently leads to GDP growth, and GDP growth leads to job growth, it should be no surprise that housing construction (blue) increases lead to job growth (black).
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This week’s data shows us the best housing construction growth in eight years, and equal to the best growth in over 25 years! This rate of growth in construction is associated with a subsequent 4-5% year over year GDP growth, and with 2% or 3% jobs growth within the next year or two.
In other words, the best national economic news in a long time.
While I’m at it, there is more good economic news in car and light truck sales. This shows that small business (85+% share of US GDP) have improved confidence in their future business. The average age of trucks and cars on the road is over ten years old, which is a strong indicator that consumers have been putting off new vehicle purchases.
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Another piece of positive data is that consumer credit has been growing fairly consistently since reaching a low point in 2010. The chart below shows that the average consumer has increased their spending in the last couple of months. When you look at this realize that consumer credit has been virtually non-existent since the recession. The unemployed or those facing foreclosure spend very little on retail purchases
Most in the real estate business are aware that retail nationally has been challenged over the last few years. Real retail sales are the “holy grail” leading indicator for jobs over the next six months or so. Measure consumer credit levels year over year and then divide by two, and you usually get a pretty good idea of national job growth in the near future. The trend in growth had been declining but has now rebounded.
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We have begun to see the re-accelerating of retail sales growth. Americans may have slowed their spending in September 2012 after splurging in the month before during the busy back-to-school shopping season. But more importantly, they are still spending. Still, given the economic and political uncertainty that weighs on many Americans right now before the election, analysts say the results are an encouraging sign for stores as they head into what’s traditionally the busiest shopping period of the year in November and December.
Right now consumer confidence is at a seven-month high as people are feeling better about rising home prices and a rebounding stock market. Still job growth remains weak and prices for everything from food to gas are higher. On top of that, there’s a worry that the U.S. economy will fall into another recession next year no matter who is elected. That’s when tax increases and deep government spending cuts will take effect unless Congress reaches a budget deal.
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Because of economic and political uncertainty, The National Retail Federation, the nation’s largest retail trade group, tempered its expectations for the winter holidays. The group said early this month that it expects sales for the November and December period to rise 4.1 percent.
That’s more than a percentage point lower than the growth in each of the past years and the smallest increase since 2009 when sales were up just 0.3 percent. But the retail forecast still is higher than the 3.5 percent average over the past 10 years.
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Another indicator I became aware of many years ago was how restaurants are doing. When I first got into looking at market indicators for housing, I was told by one of my mentors (Nash Phillips and Clyde Copus) to talk to the dry cleaners to see if the use of nice tablecloths and napkins was on the rise. Now, having just received a degree at the University of Texas, it didn’t seem right to use what I saw as a silly indicator ……Guess what? We still look at what local restaurants as well as national restaurant chains are doing as an indicator of national and local economic strength.
Below you can see that restaurant owners are saw a recent spike up in their outlook. (They’re a great measure of consumer discretionary spending).
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Looking locally in our Texas metros, we have seen aggressive expansion of local and national restaurant groups. In Austin, Larry Maguire has opened three new restaurants (Fresa’s Chicken Al Carbon, Clarks, Elizabeth Street Café) in the last eight months to strong acclaim. San Antonio and Houston are seeing the same level of expansion of the local national chains. These expansions are taken lightly in light of the last five years of closing many stores.
Another indicator that always has been a bellwether to better home sales is home improvement stores performance. With the surge in construction, you can see below Home Depot continues to improve People tend to either fix up their old house to live there longer or sale to move up. Home Depot performance shows continued strength for an extended period.
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The unemployment rate is improving. Both the headline rate (U3 BLS) and the “true unemployment rate” (U6 BLS) of unemployed and underemployed are declining. With the continued confidence, businesses should continue hiring and employment rates should continue to improve. Is the worst behind us? There will always be some concern after such a long recession and loss of personal wealth in real estate and investments. But again most indicators seem to have turned upward away from the bottom.
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The takeaway from this analysis is that both the long leading indicator of housing and the short leading indicator of consumer spending are pointing to an improving jobs picture in the near future.
Take these indicators with a healthy dose of caution. Most of the nation’s metros and states are five to ten years from full recovery, and some areas are 20+ years (think of Texas in the 90’s). Further, the financial constraints of Dodd-Franks and Basel III will put a damper on this growth nationally.
Then again, if you’re reading this you probably live in Texas, where one out of four jobs since the recession is created. What Texas has to worry about is where we are going to put all the people moving here – a good problem to have.
So what does this mean for us in Texas? Hopefully continued employment growth. According to data from Texas A&M Real Estate Center, Texas real estate has increase 240% over the last 5 years for a total value of $1.6 Trillion. All channels, residential, commercial, industrial, and ranch have increased in value and should continue to appreciate.
If you are thinking you should wait to buy or till rates get better, I think based on the data you better hurry…we have long passed bottom in this state.