A leading indicator known as housing

People spend big money not only on their homes, but also what goes in them, which inevitably means that housing data can be a leading indicator of economic activity months in advance. The total value of the U.S. housing market in 2018 was $33.3 trillion, up 6.2 percent from 2017, according to studies by Zillow Group.

The housing market represents about 15 percent to 18 percent of U.S. GDP i.e. a weak or strong housing market can have substantial influence on the direction of the overall economy.

In early 2019, the U.S. housing market appeared to be heading in the direction of continued strength – with a few red flags: the potential for higher interest rates, ongoing home price increases and tight housing supplies.

Housing starts take a tumble

Released monthly data by the U.S. Census Bureau, namely housing starts and building permits, are among the most widely-followed indicators. Stronger- or weaker-than-expected starts often move equity, bond and commodity prices.

In December, housing starts dropped 8.2 percent nationwide from the same month a year earlier, the largest percentage drop in over two years. The December decline followed two months of strong gains. That being said, any extended weakness cannot be ruled out.

Why? Any business based builders wouldn’t start a house unless they are reasonably confident it will sell upon or before its completion, for the reason that sharp declines in housing starts have been a key indicator of each recession since 1960.

House Value Gains Are Slowing, But Still Trending Up

Climbing interest rates in recent years have made mortgages costlier and contributed to slower increases in home values.

A survey of economists conducted by Pulsenomics LLC estimated that on average U.S home values are expected to rise by 3.8 percent from 2018 in 2019.

The combination of higher mortgage rates and higher home prices, rising faster than incomes and wages, means fewer people can afford to buy a house. Reduced affordability is slowing sales of both new and existing single-family homes.

Outlook for Mortgage Rates and the Fed

The Federal Reserve hiked its benchmark short-term funds rate four times in 2018 as the U.S. economy gained strength. The Fed’s current tightening cycle, which started in late 2015, has pulled longer-term rates higher, including those for home mortgages.

At the end of January, fixed rates for 30-year mortgages averaged about 4.46 percent nationwide, up from 4.2 percent a year earlier, but down from nearly 5 percent in November, when rates reached the highest levels since early 2011.

Traders in Fed Funds futures are not expecting any additional rate hikes in 2019, as of early February. If the Fed holds rates steady, mortgage rates may follow.

Supply and Demand

For the last couple years, tight inventory has been the most important metric supporting home prices. Lower-priced homes, depending on the region, typically led the broader U.S. housing market in recent years.

For some high-end markets, supplies could tick higher, as some people decide to put their homes up for sale.

China and Other Economic Matters

If China’s economy, the world’s second-biggest after the U.S., continues to slow, that probably will keep a lid on interest rates, if not send rates even lower.

If China’s growth continues to erode, the country could take steps to weaken its currency, the yuan, to stimulate exports – another potential wild card that could tamp down U.S. rates.