At the surface level, 2019 has been a positive year for stocks with the S&P 500 (SPY) gaining nearly 20%. Despite these gains, it's been much more turbulent and challenging under the surface. Cyclical sectors exposed to the global economy have struggled, while interest-rate sensitive stocks have soared to new highs in many cases.
Therefore, it's interesting to look at housing, as it is cyclical and also sensitive to interest rates yet insulated from the global economy. The sector is benefitting from the relative strength in the domestic economy, lower interest rates, and favorable supply/demand dynamics. These factors are also reflected in recent housing data as well as the price action of stocks in the sector.
Overview
Most of the gains in the stock market this year took place from January through May. Since then, the broader market has traded in a 10% range. Notably while stocks haven't made any real progress over the past five months, the homebuilders ETF has trended higher with higher lows and higher highs.
This relative strength is another indication that the weakness in manufacturing and the global economy is more than offset by strength in the domestic economy and the stimulative effects of lower interest rates. Lower interest rates translate into lower mortgage rates which makes houses marginally more affordable thus boosting demand.
Within the housing sector, some of the strongest stocks have been in materials. In fact, some of these stocks have been making new highs such as Martin Marietta Materials
.
Strong Fundamentals
Since the housing bust in the last decade, new homes simply aren't being built fast enough to keep up with population growth. This can be seen in the chart below which shows that vacant housing continues to decline to 2006 levels despite the population being 10% higher.
Low housing inventory is positive for home price appreciation and indicates that increases in homebuilding activity are inevitable, if current economic conditions persist. Essentially, we've been working off the excess, overhang from the previous boom, when too many houses were built.
Looking forward, new home permits remain depressed from previous cycle highs in 2006 and 1999 despite significantly lower populations. The new home permit data indicates that supply is likely to remain depressed going forward, and there is plenty of upside for more new homebuilding in this cycle.
On the demand side, conditions are similarly supportive. Below is a chart showing that mortgage debt service payments are just around 4% of total disposable income which is a nearly 40-year low. Basically, the household balance sheet is in a good place. There's no signs of excess or financial stress.
The balance sheet has improved and so has income statements with real personal income steadily growing after flattening in the early part of this decade.
Housing is in a sweet spot. Interest rates have declined due to concerns about a slowing manufacturing sector. So far, the labor market and consumer spending have been unaffected. Any weakness has been more than offset by the boost from lower rates to housing. These positive circumstances are reflected in the price action of the sector and the positive economic data.
