Ex-Factor: Housing Holds Some Economic Keys

Housing has been a frustrating segment of the economy to analyze, both since the pandemic first erupted and the Federal Reserve embarked on an aggressive rate-hiking cycle two years ago. So-called "traditional" housing indicators—which typically act as signals for where the broader economy is headed—have misfired in this unique, pandemic-driven economic cycle, telling us time and again that a broad-based recession is imminent, when it has in fact failed to materialize. A dearth of home supply (a phenomenon that preceded the pandemic), record-high home prices, and an inflationary surge have put immense pressure on homeowner affordability over the past few years—thus putting commensurate downward pressure on consumer confidence metrics.

That said, despite the misfire from key leading indicators, there are signs that the sector is recovering. There are also signs that the affordability crisis is abating, albeit slowly. As housing was the first sector to kick off the rolling recessions we've pointed out for more than two years, it now looks like it's participating in the start of rolling recoveries. That comes with an important distinction, though: A recovery is not synonymous with a booming expansion.

Still recessionary?

One of the most relied-upon leading economic indicators is the Housing Market Index (HMI) from the National Association of Home Builders (NAHB), which tends to peak well in advance of a recession, giving a firm warning sign that a slowdown is coming. As shown below, the HMI peaked in 2021, undergoing a mild initial descent and then a waterfall decline that accelerated in 2022.

After hitting a trough in December 2022, the HMI bounced sharply, entering what looked at the time like a durable recovery. That proved to be a head fake, though; since that bounce, the HMI has been chopping around in a rather wide range.