Cars, Corn, and Consumer Confidence

At a recent meeting with an investment committee of a local not-for-profit, I was asked what I felt was the leading indicator for economic growth. My response was housing. Thus my interest in this article. The direct economic impacts are obvious. Residential investment comprises somewhere between 3%-5% of GDP, with consumption spending on residential services at 12%-13%. Housing demand driven by wage growth and household formation is less volatile than changes driven by interest rate movements. Therefore I believe it most important to examine demand during periods of significant moves up or down in rates, and gauge the response based upon what economics teaches us. Any deviation from such is then driven by behavior. The recent weak pending housing numbers are a bit disconcerting, given that mortgage rates have been steadily declining since last November. New home sales -12.8%, pending home sales -2.5%, and mortgage applications -6.2%. My concerns regarding housing are more of a secular nature related to absorption of excess square footage. However, and cyclical downturn may serve to exacerbate and secular changes as well.