It’s never possible for us to boil the economy down to just the one number or signal that will tell us everything. Sadly it’s just all too complex and even chaotic for that. So, we must do the best we can by looking at a number of signals and thinking through where they lead us.
What’s necessary here is to understand how one of these pieces, these fragments, then fits together with the rest of the economy in order to paint our larger picture. For example, here we’re going to look at some recent housing related statistics. OK, that’s great, we can think of this just as a look at whether real estate is an interesting investment for us.
But we should also think of this as part of the larger system. If people are enthusiastic about buying houses then we can assume that they’re feeling pretty good about the economy – people don’t make the largest investment of their lives when they’re entirely worried. It’s also true that the very act of moving house leads to a certain amount of economic growth. New bathrooms, new kitchens, all that, that does mean spending and demand out there.
Our statistics never will tell us everything even about housing alone. But as long as we think of all of this as just more evidence in favour – or against of course – a view of the economy then we’ll do fine.
FHFA house price index
The FHFA says house prices are up:
“Home prices grew by 5.4 percent in the second quarter of 2020 compared to a year ago, despite the impacts of COVID-19.” said Dr. Lynn Fisher, Deputy Director of the Division of Research and Statistics at FHFA. “Although house prices fell slightly in May relative to April, in June prices rebounded by 0.9 percent over the month as local economies re-opened and transactions picked up again.”
(FHFA house price index from Moody’s Analytics)
We’re certainly not seeing any wilting under coronavirus pressure from that source of information.
We also have the Case Shiller numbers for the month:
S&P CoreLogic Case-Shiller 20-City Composite Index. The not seasonally adjusted index is up 3.5% from June 2019.
Slightly different sample so a slightly different number but the same general story:
(Case Shiller indices from Moody’s Analytics)
The other part of the market we’re interested in is transactions numbers. Gently rising prices are nice but it matters how many are changing hands.
New Residential Sales:
We can also look further afield such as here and note that such sales are the highest they’ve been since 2006 – although still well off boom time numbers – and that new permits are tracking, as they should sales.
As I say at the top
No one piece, or even selection, of information can tell us absolutely what is happening. But the more pieces we’ve got then the closer we can get to a reasonable general view. What we’ve got with this set of housing information is that both prices and volumes of transactions are rising nicely. Without, note, getting anywhere close to the sort of frenzy around the start of the century.
From which we can say two things. Firstly, that if real estate is the sort of investment you might be thinking of then conditions look pretty good. Secondly, that the macroeconomy also looks pretty good from these figures.
People just don’t go out and buy housing when they’re worried about the future so confidence is good. Further, the very fact that transactions are happening in volume is good for the economy itself. It creates demand, something we’re a bit short of at present.
This isn’t really a recommendation nor an evaluation of real estate as an investment. I’ve not gone into enough detail for that although what we do have here is an absence of evidence against the idea. My interest is more to illuminate the macroeconomic conditions and they look just fine from this viewpoint. We’re not in a frantic boom but we are in a rising market with a healthy number of transactions. Given the paucity of demand post-Covid that’s just what we’d like to be having too.
The investor view
As I say this isn’t really an investigation of direct investment into real estate. It’s more using the statistics from that market to illuminate the whole economy. As such we’re looking fine.
The knock on of this is that we gain no specific investment advice from those macroeconomic numbers. Current markets are about rightly priced for a reasonably swift recovery. That seems to be what we’re getting so markets are reasonably priced. That’s about as far as macroeconomic analysis can take us. We therefore have to turn to microeconomic factors to determine our investments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.