Burning Down the House

Contrary to the revered Talking Heads, we’re not burning down the house, but the housing market is burning up!  You may have noticed… 

Some of us spend time delving deep into economic analysis, market reports, and various forms of information, to keep our fingers on the pulse of what’s going on. Some of us don’t, figuring we can’t directly do anything about macro-scale economic shifts, other than adapt or react. Plus our eyes can glaze over, getting buried in soul-crushing, mind-numbing data overload. Whatever your level of interest, we are all subject to changes – subtle or dramatic - in economic activity.

The field of economics has been defined as primarily concerned with the “allocation of scarce resources, which have alternative uses.” Most of our daily decisions involve economics because every moment of our time has alternative uses, as does every dollar. Consequently, the more info you have, the more informed the decision-making. 

Which leads me to LegalShield’s  Economic Stress Index (ESI), a suite of leading indicators of the economic and financial status of U.S. households and small businesses. We find all the data an informative reflection of up-to-date activities, indicating past trends and probable future movements, and I’m happy to share it with you.

The ESI is comprised of five sub-indices that are constructed from LegalShield’s proprietary data, which reflect the demand for various legal services over the past 15+ years:

• Consumer Stress 
• Bankruptcy 
• Foreclosure 
• Housing Construction 
• Housing Sales 

Let’s focus on the last two categories related to housing. Even those of us not paying undue attention to the housing market, have probably noticed higher prices for homes, increased cost for construction materials, supply chain issues, and interest rates. We certainly noticed COVID-19 and the ensuing disruptions it spawned, which has had a dramatic effect on all-of-the-above.

I won’t rehash everything, but instead focus on the key takeaways: 

Our Housing Construction Index fell for the third consecutive month in December, though it remains historically high. While builders are contending with high materials costs, difficulties hiring skilled labor, and supply chain disruptions, construction activity remains at a healthy level. Housing starts rose 12% in October and were 8% higher compared to a year ago. In all, the data suggests that homebuilders should benefit from elevated demand for new homes in the months ahead, despite labor supply constraints and high input costs. 

Meanwhile, the Housing Sales Index fell to its lowest level since July 2020, as overall housing demand slowed due to low inventories and high prices. However, strong Millennial demand should keep sales healthy in the near term. The combination of high prices, low inventory, and rising mortgage rates will likely slow sales compared to the frantic pace of 2021, though housing sales are expected to remain elevated by historical standards thanks to sustained demand.

So we’re starting to stabilize, but at a higher price point. Add to that the Jan.26th statement by Federal Reserve Chairman Jerome Powell: “I would say the committee is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so.” 

Plus, consumer inflation is now running at a 7% annual rate. 

Mortgage rate increases are inevitable; you’ll pay more for an existing new house, or pay more to build one, and pay more for the money to finance it! (Not good if you’re buying, but great if you’re selling.) 

So, yeah, maybe cooling a bit, but the housing market is still on fire. 

Isn’t economics fun?