If the current downdraft pouring upon the equity markets — specifically, the Dow Jones market crisis where 890 points were lost in two days — is any indication, the artificial modulation of the economic infrastructure will abruptly come to an end, and probably soon. As has been suggested by multiple experts, there’s only so long before the real fundamentals overcome any financial engineering. This is especially true for the stock market, which has seemingly been driven by hot air. But another sector that is about to have a comeuppance is far more important — real estate.
Along with what we can now call utter fantasy — that the economy is in recovery mode — comes the assumption that housing sentiment has also rallied. After all, if people are returning back to work en masse, surely, this must mean that the real estate markets will once again be buoyed with an influx of cash.
In fact, housing starts — the breaking of new ground for home construction — has reached a growth rate similar to that seen just prior to the Great Recession, according to data from the U.S. Department of Commerce. Likewise, the National Association of Home Builders released its homebuilder sentiment index, which hit multi-year highs.
Naturally, this would entail a cause for celebration, a surefire indication that the current presidential administration’s policies really do work. Sadly for those that live in the real world, housing starts data suffer from what is known as a spurious correlation. The more technical term would be bullsh-t.
Housing starts and the homebuilders index are supply side indicators — they imply a contractual willingness by real estate developers to start development. Thus, for a certain length of time, they move far ahead of demand — ie. real buyers — because buyers can’t buy what is not there.
But an increase in supply does not suggest, nor does it necessarily influence, an increase in demand. If people don’t have the resources to go on a real estate shopping spree, they simply won’t do it. And that is exactly what is occurring right now.
Total new home sales in the United States — though it was growing fairly well in 2014 — is not doing so well this year. In fact, the average month-over-month sales rate for new homes in 2015 is actually negative, at -0.21%. However, homebuilder stocks, such as shares of renowned real estate developer D.R. Horton, Inc. (DHI), have been blowing past the performance metrics of both real housing demand and the underlying benchmark indices like the S&P 500 or the Dow Jones.
For now, many housing builders like DHI enjoy lofty valuations in the stock market, but that condition can’t possibly last so long. As the fundamentals ripple through the major indices, look for real estate investments to start feeling the pain shortly.