Housing: Rolling in (and out of) the Deep

After falling into its own recession last year, the housing market has started to turn decisively higher; but a sustained recovery might not be the strongest elixir for the economy.

One of our central theses for the better part of the past year is that the economy has been plagued by rolling recessions—bouts of weakness that weren't powerful enough to bring the entire economy down (courtesy of offsetting pockets of strength). As shown in the chart below, the first sector of the economy to fall into its own recession was housing. Proxied by the National Association of Homebuilders (NAHB) index, housing took a deep dive throughout 2021 and 2022 but has since started to show signs of life.

Given this report focuses on the housing market, we'll opine on the other indicators in the future; but the key to watch for are signs of life in confidence metrics and the manufacturing sector. A sustained turn higher would confirm the transition from rolling recessions into rolling recoveries, but it's too soon to make that determination.

Housing rolling into recovery

The latest move higher in homebuilder sentiment had healthy breadth given that all of the index's components moved higher, led by the gain in expectations for single-family home sales in this year's second half. The optimism was also widespread throughout the country. The monthly report showed that optimism was due to improving supply chains and the low level of existing home inventory. The one rub was the citing of credit conditions, which have tightened notably and could crimp future growth.

Given homebuilder sentiment is one of the leading economic indicators, one would expect a material turn higher in home sales to follow the recent return of optimism. That has happened to some extent, but not evenly. As you can see in the chart below, sales for both existing and new homes have bounced off their recent troughs, but the strength has been more pronounced in the new home market (caveat: this report was published before the release of May new home sales data). Not only did new home sales find their recent trough sooner (last July), but they're up by 26% (through April) since then. Existing home sales are up by a weaker 7% (through May) since their trough in January.

New home sales recovering faster