What Investors Can Really Learn From Housing Market Data

Daniel Acker/Bloomberg
Daniel Acker/Bloomberg
Few economic indicators are more meaningful than the housing market. Buying a house, after all, is the ultimate sign of consumer confidence, and building a house is the first hint that suppliers are readying themselves for an economic upturn.

But housing market reports are also some of the most abused and manipulated data around. Given the huge role that the housing market plays in our lives, it's important to interpret the data about it correctly. So with two new housing reports released this week, let's take a rational look at what we can really learn from these elusive indicators.

Reading the Real Estate Tea Leaves

Dozens of housing reports have their brief moments in the headlines, but all can be whittled down to present and predicted supply and demand. Demand reports tell us who's buying, while supply tells us who's selling.

This week, investors got a taste of demand from the National Association of Home Builders/Wells Fargo Housing Market Index. The index surveys homebuilders on current sales, prospective buyer traffic and future sales expectations.

The latest report, which shows current sales continuing to increase, is typical of a slow and steady housing recovery. But it's the predictions that pack the real punch: Future sales expectations hit a five-year high -- a signal to investors that expendable income could keep markets moving higher in the months to come.

Housing chart 1
Author, data from NAHB.org

On the supply side, things look more complicated. A new Commerce Department report revealed this week that "housing starts" -- new construction projects -- dropped 16.5 percent for April:

new construction

But hidden in the same report was a hint of hope for wise investors. Although housing starts took a hit, housing permits for future construction increased 14.3 percent. That means that persistent demand may have finally built up enough to convince builders that buyers are back.

So Where Is Housing Actually Headed?

On the demand side, steady upticks in confidence surveys and home prices hint at a post-recession rise in consumer spending. These are the "first movers" of a recovering economy and can signal either (a) another bubble burst, or (b) a sustainable movement to economic improvement.

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To decide which, we turn to supply. The supply side has lagged behind, put persistent demand seems to finally be wearing down home suppliers' wariness. Buyers are gobbling up existing homes as increased construction spending puts new homes on the market. "Supply squeeze" has been on the tip of housing analysts' tongues for most of 2013, and the next few months will be crucial to suppliers' decisions to match demand.

Housing Hints

There's a lot of manure in macro news, but housing data provides a clear hint at where the broader markets might be headed. While analysts have recently been making headlines warning about overpriced markets and ready-to-burst bubbles, in reality, increasing supply and spending point to a rational rise in housing and stock markets.

Wise up to macro scare tactics, seek out the best companies regardless of market movements, and you'll be well on your way to pulling sustainable profits for years to come. And with any luck, you may even find yourself in the market for a new house.

Motley Fool contributor Justin Loiseau owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our newsletter services free for 30 days.
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