Housing is one of the most important parts of the economy beyond just its 13% slice of U.S. gross domestic product (GDP). When the housing market is strong, you have an enhanced 'wealth effect'. Academic research has shown that when people feel wealthy, they spend more money which is pretty intuitive. This also applies to the stock market and is one factor in the strength of consumer spending.
It also has big implications for employment and other services that are adjacent to housing. In fact, many believe that one reason that the U.S. economy never dipped into a recession from 20012 to 2020 despite recessions in many parts of the world is that the housing prices were gaining which was offsetting other sources of weakness.
And during this recovery, housing has been one of the primary drivers. Demand for homes surged due to the pandemic with people eager to move out of urban areas and into suburban and rural areas. This was also abetted by low mortgage rates and inventories that went from low to historically low.
Currently, there is now a debate about how long the housing bull market can last. Skeptics would point to rising mortgage rates which did put a damper on housing activity in 2018 when rates got above 1%. They also say that the combination of inflation, eating into savings and spending, plus the increase in home prices is making affordability a challenge.
Bulls would say that prices will keep rising until the inventory imbalance is corrected. Making this problematic are supply chain issues with backlogs for items like windows and cabinets between 6 and 12 months. Further, demand will be strong despite higher rates due to demographics and household balance sheets that remain in good shape on an aggregate basis.
Of course, the biggest determinant of which side is correct will be housing data. So far, it's showing a deceleration from very high levels but nowhere close to being in contraction mode. In fact, this is a healthy and sustainable development.
But, the mystifying thing is that housing stocks have considerably weakened over the past couple of weeks despite strong housing data, most likely in response to rising mortgage rates. As a result, many homebuilders and building material stocks are trading at 6-month lows.
For investors who believe that the housing bull market has more room to run, this could be a great opportunity to buy on the dip, especially as valuations are quite low and recent earnings reports were very strong.