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Has an Improving Job Market and Cheaper Borrowing Costs Revived the Residential Real Estate Market?

Has an improving job market and cheaper borrowing costs revived the residential real estate market?  Home construction rebounded in July by the greatest amount since November, rising by 15.7% to a 1.09 million annual rate.  Permits also exceeded expectations, rising by 8.1% to a 1.05 million pace thus suggesting housing should remain robust for the intermediate future.

It is generally accepted approximately 1.5 million houses must be started annually to meet innate demand.  The average for the last five years is 723K, the result of the building boom of 2004 2008 where an average of 1.84 million houses was started annually.

Is the housing industry entering into an elongated cycle similar to that of the auto industry?  In my view the similarities between the two are great.

An increase in home building is pivotal if the economy is to enter the proverbial escape velocity mode.  Many measure their net worth by the value of their home not by their stock portfolio.

2013 information from the Investment Company Institute states the average stock portfolio is worth $39,000 and approximately 47.1% of households own publically traded securities.

According to a 2014 Census Department study, approximately 64.7% of people own their homes and the average value of a home is $269,800.  I think it is noteworthy that historically 65.2% of society owns home, thus suggesting there is nominal imbalance.

According to the Federal Reserve the average mortgage balance in January 2014 is $156,474.

Housing is also the leverage play.  Any increase in value automatically increases one’s net worth (and vice versa).

Depending upon the data point used, and according to the National Association of Realtors home prices are up about 30% from their nadir in 2011.  I must write prices fell about 33% from their 2006 according to Case Schiller Home Price Index thus suggesting about half of the drop has been erased.

As asked above, is the economy poised to enter the escape velocity mode led by the typical accelerant—housing?

Perhaps FRB Chairman Yellen can offer some insight when she speaks tomorrow in Jackson Hole.

Today the Minutes from the July 29-30 FOMC meeting are announced.  Will all ignore the Minutes and instead focus upon tomorrow’s speech?  Perhaps.

Commenting upon yesterday’s market activity, stocks staged another light volume rally amid economic optimism and a relatively benign inflationary environment.  Treasuries were essentially flat.

Last night the foreign markets were mixed.  London was down 0.41%, Paris down 0.28% and Frankfurt down 0.36%.  Japan was up 0.03% and Hang Sang up 0.15%.

The Dow should open little changed ahead of the Fed Minutes as such is expected to be dovish.  The 10-year is off 2/32 to yield 2.41%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.