What supported the rebound in the housing market data?

Real estate, as an interest rate sensitive sector, is extremely informative in terms of how it changes for us to grasp the economy.In real estate, the most leading indicators would be new housing construction and building permits. So, today we'll look at what these two data tell us about the state of the housing market and the economy right now.

The data shows that in May, new housing construction in the U.S. came in at an annualized 1.631 million units, 21.7% higher than in April and about 5.7% higher than last May. This staggering figure was not only the fastest gain in a year, but also exceeded all forecasts. According to Bloomberg, market expectations are around 1.4 million. Once construction starts, demand for materials, appliances, etc. will also come up. This should help support the performance of these related companies and is also a data point to support an improving economy.

The more important data is the building permits. This reflects the willingness to build homes in the future and can help us determine whether the current rebound in new housing construction in May can continue. The data show that in May, home building permits came in at an annualized 1,491,000 units, 5.2% higher than in April and higher than the market's expectations. However, the year-over-year gain was still -12.7%, meaning that the overall housing market is still not as good as it was last year and is still in a relative slump.

In the high interest rate environment, few people are willing to change houses, because once they do, they have to bear higher interest rates, so the supply is reduced, and there is already a structural shortage of housing in the U.S., so the supply side is supporting prices. There is also good news from the demand side, the current rate of household formation in the U.S. is already higher than before the epidemic, and these people need a place to live, so this not only supports the current housing prices, but also makes developers willing to build new ones to meet this part of the demand. It seems unlikely to me that the housing market will drag inflation down in the second half of the year, and more likely to stabilize at a high level, both in terms of house prices and rents, meaning that the housing market will not be a factor that slows inflation.

It is not yet possible to conclude that such upward momentum will continue, but the recent developer sentiment survey shows that they have been consistently optimistic these past few months. This means they are seeing business recovering and is an important signal to support the current economic upturn. On the other hand, a firm housing market is also bad for inflation and may allow the Federal Reserve to continue to raise interest rates or keep them high, putting some pressure on the economy to grow.

For investors, I think we need to pull back and look at it. In the short term, the market has told us that it doesn't care about interest rates and cares more about the economy, so with housing data like this, the odds are that it will still continue to support the stock market higher. But at the same time, because the market is now so enthusiastic and expectations for the economy are rising, this is instead a time when we investors should be more vigilant. The Fed's aim is to slow down the economy, the impact of high interest rates still exists, and consumers have student loans and other shocks in the future, all of which will put pressure on the performance of companies. If they do not meet the high expectations now, then valuations will also need to be adjusted. This is also one of the biggest risk points in my opinion for the future.