The housing cycle is the business cycle - Can housing tell us something about the real economy and policy

 

Housing markets are sensitive to interest rates. Housing markets also are sensitive to rising disposable real income and the business cycle. Housing markets given the slow changes in supply can be subject to bubbles. A slowdown in economic activity or a change in consumer optimism makes housing a good indicator of economic health.

The GFC may have been caused by the reversal in the housing market, but other business cycles have seen housing turndown precede or be coincident to a general downturn. 

Housing can be a canary in the coal mine with respect to recessions. The Fed sees these numbers but feels the housing markets can be sacrificed for the good of bringing down inflation through higher rates. 

Housing supply has spiked as seen in other recessions. We are seeing traffic of buyers slow. Housing is selling at a decreasing rate and the number of homes for sale is increasing. Housing prices YoY are still positive, but price measures like the Case-Shiller index have a lag structure that is not giving us a good idea of current conditions. More recent survey data are showing growing weakness. 

There is a housing bubble across the US, and it is much worse than anything seen in 2007-2008. The leverage may not be the same, but the price increases are significantly higher in many cities. The peak may have been reached and now we will see how much prices will fall. This will have a negative wealth effect on consumer which will be enhanced with the negative wealth effect from holding stocks and bonds. The canary is singing but the tune is not anything investors would like to hear.