Keep Your Nest Egg Safe Watch Housing Data

They'll tell you a lot about the economy's future

Carpenters. Masons. Realtors. Mortgage lenders. Interior decorators. Landscapers. Millions of Americans hold jobs tied to the housing market. Indeed, housing directly and indirectly accounts for a tenth of the U.S. economy's output. So it's little wonder that homebuilding and sales generate a slew of economic data.

Curiously, though, before this year, financial markets greeted most housing data with a ho-hum attitude. According to a Goldman Sachs ranking of market-moving data, only the housing starts report made its top 10, and that was just in the bond market. This year, however, Wall Street will likely take more notice of the housing data. So should you.

Why? Utmost on Wall Street's mind right now is the future of Federal Reserve policy. The Fed wants the economy to slow before inflationary pressures take off, and housing is perhaps the sector most sensitive to interest-rate changes. If you want to gauge the Fed's success in curbing growth, you have to watch housing. If housing starts don't fall from their robust current annual rate of about 1.7 million, stock and bond markets will likely weaken on expectations of more Fed tightening.

Moreover, in this New Economy, housing may have to be more of the Fed's whipping boy than in the past. David F. Seiders, chief economist of the National Association of Home Builders, says that "with the burgeoning tech sector impervious to interest-rate swings, [Fed policy] may require a heavier burden on Old Economy sectors. And housing is Old Economy."

DOMINO EFFECT. Here's how housing could be at the center of an economic slowdown: Higher mortgage rates mean fewer people can afford a home. So housing starts fall. Builders stop hiring and, perhaps, lay off workers. Manufacturers see orders fall for steel, plumbing fixtures, carpets, and appliances. Factories cut hours and then payrolls. Home sales decline, and realtors see commissions fall. Employees at your nearby Pottery Barn and Home Depot work fewer hours.

Under this scenario, both income and job growth will slow, and consumer spending will weaken. Real gross domestic product, which soared at a 7.3% annual rate in the fourth quarter, could decline to the Fed's desired pace of about 3 3/4%. For 2000, BUSINESS WEEK forecasts housing starts will fall to 1.6 million from 1.68 million in 1999; new-home sales should be about 886,000, down from 906,000 last year.

Like almost all new homes, housing data begin life at one of the 19,000 local permit-issuing offices scattered around the U.S, says Dan Sansbury, chief of the Residential Construction Branch of the Commerce Dept. In a monthly survey mailed to about half of those offices, Commerce asks how many permits were issued for single-family homes, buildings with two to four units, and apartment buildings of more than five units.

Field representatives select a random group of the single-family homes and almost all of the apartment buildings. They then follow the samples through the entire process, from the first shovel in the ground to laying the flooring, to the sale--a timeline that can extend to seven years. Bear in mind that housing is weather-sensitive. But most economists do consider any weather surprises in the previous month when projecting building activity. Commerce issues its joint report on each month's starts and permits in the middle of the next month, and new home sales are available around the end of the month. Like all housing reports, both are available on the Web (table).

The number of starts for any given month is typically much higher than the level of home sales, because Commerce counts a new home sold only if the transaction includes the sale of the land. Hire a builder to construct your dream home on a previously purchased lot, and it will be missed by the report.

NEW INDICATOR. Existing home sales are tallied by the National Association of Realtors from reports by members. Resales don't directly affect GDP. But the indirect impact can be large because consumers spend more on home-related goods and furnishings when they buy an existing home than when they purchase a new home. Indeed, Ian Shepherdson of the consulting firm High Frequency Economics in Valhalla, N.Y., points out that investment in home construction accounts for about 4% of GDP, but retail buying of related goods accounts for another 6%.

A relatively new indicator is the NAHB's Housing Market Index. It is released on the 15th of each month and relies on the responses of about 400 builders on questions about buyer traffic, current sales, and sales expectations. The NAHB's Seiders says the index "is a reliable indicator of where single-family starts and sales are headed." And since it precedes the government's data by a month, it gives investors a clue about where the important sector is headed.

Housing directly affects the bond market, since almost every home buyer needs a mortgage. The Mortgage Bankers Association of America tracks weekly applications for loans to buy homes and refinance existing debts. Investors like the MBA index because it is released every Wednesday, covering the data of the preceding week. In addition to its immediacy, Shepherdson says the application index is "the best indicator for home sales" three to six months down the road.

Right now, the purchase index remains at a high level, suggesting the Fed's past five rate hikes have not taken any steam out of housing demand. If anything, Shepherdson says, the recent reduction in Treasury-bond supply and the resulting inversion of the yield curve means 30-year mortgage rates have fallen even as short rates have gone up. He expects the Fed to hike its federal funds rate from its current 6% to 6.75% or maybe even 7% by fall.

In looking ahead, the Fed has made it clear it won't stop raising interest rates until the economy slows. That means your portfolio is at risk as long as fears over further tightening create volatility in the markets. If you want to feel financially secure in your own little castle, keep an eye on housing. It will tell you a lot about the economy's future--and the Fed's.

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