The 21st century has seen some dramatic swings in the U.S. housing market.

The 2008-2009 Financial Crisis ushered in one of the biggest slumps in U.S. housing prices since the early 1990s. And then, as a result of the COVID-19 pandemic, the last couple of years have seen some of the largest increases in housing valuations on record.

The housing market has been in the news this spring because mortgage rates in the United States recently hit a 12-year high as a result of an aggressive campaign by the Federal Reserve to tame rampant inflation.

During the week ending April 21, a 30-year fixed-rate mortgage averaged roughly 5.11%, which is a level not seen in the market since 2010. Considering that’s nearly double the rate observed at this time last year, it’s no great surprise that this developing situation is catalyzing a slowdown in the previously red-hot housing market. 

But to what degree is the market slowing, and for how long? 

These are difficult questions to answer. However, investors and traders—not to mention potential homeowners—can monitor the ongoing health of the housing market using two important indicators: new building permits and the NAHB/Wells Fargo Housing Market Index.

A quick review of these two metrics provides important insight into the state of the current housing market, as well as the broader trends in this key sector. 

New Building Permits

One of the most reliable indicators for the U.S. housing market are new building permits.

New building permits are a form of legal authorization granted by a government or regulatory body that must be approved before the construction of a new building can occur. On the 18th day of each month, the U.S. Census Bureau announces the number of finalized new building permits that were granted during the previous month. 

A close cousin of the new building permits metric is new housing starts, which reports on the number of new permits which saw an actual start in construction. 

These reports are closely followed by both market participants and economists because they offer a snapshot of not only the U.S. housing market, but also the broader U.S. economy. Sharp declines in new building permits/starts have traditionally accompanied significant U.S. economic contractions (i.e. recessions and depressions).

For example, during the 2008-2009 Great Recession, new housing starts dropped to some of the lowest levels on record. In January 2009, new housing starts dropped down to 466,000. That was approximately 80% lower than the figure observed in January 2006, which was 2.3 million. 

Although briefer in duration, new building activity plummeted in similar fashion during the onset of the COVID-19 pandemic. Back in March of 2020, new building permits dropped down to an annualized rate of 1.2 million. That was down from roughly 1.5 million in January of 2019.

Over the last 12 months, new building permits have averaged about 1.7 million, which is well above the average observed during the last 25 years. And in March, the figure was above 1.8 million, as highlighted below. 

Analyzed in a vacuum, the above suggests that demand for new housing in the United States remains robust.

However, there is absolutely no doubt that higher mortgage rates will have an immediate and significant effect on this metric. For this reason, investors and traders may want to monitor this figure closely in the coming months.

The NAHB/Wells Fargo Housing Market Index (HMI)

Another great indicator that market participants can follow is the National Association of Home Builders (NAHB) and Wells Fargo Housing Market Index (HMI).

The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members and is designed to provide key insight into the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes during the present time, their view on the next six months, and to report on the level of prospective buyer traffic. 

The NAHB/Wells Fargo Housing Market Index has been published since January 1985. The index hit an all-time low of 8 in January 2009, and an all-time high of 90 in November 2020. In March, the index clocked in at 77—still well ahead of its long-term average of 53. 

Like new building permits, the Housing Market Index is used by a wide spectrum of parties to assess the health of the U.S. housing market, as well as the overall health of the U.S. economy.

Overall U.S. Housing Outlook

The aforementioned figures suggest that while the U.S. housing market remains strong, there may be a new trend emerging—likely catalyzed by sharply higher mortgage rates.

New building permits and housing starts remain robust, but the Housing Market Index has dipped from its peak of 90 in November 2020 to roughly 77 in April 2022. That’s still well ahead of the metric’s long-term average of 53.

Additional data from the housing market indicates that a slowdown may be taking hold. 

For example, online searches for “homes for sale” are down roughly 10% year-over-year. Likewise, Redfin reported recently that 12% of the sellers on its site cut their prices during the first nine days of April.

With potential homebuyers set to pay hundreds of dollars more per month to finance a mortgage, it’s likely that the slowdown could intensify in the coming months. 

However, one also has to consider that inventory in the U.S. housing market is currently on the low end of the spectrum. That means that while there may be some room for a cooldown in the sector, it’s not likely to be severe, at least for the foreseeable future.

It would likely take a protracted contraction in the underlying economy—as observed during 2008-2009 recession—to catalyze a sharp reversal in the current trend. 

To track and trade the U.S. real estate market, readers can add the following symbols to their watchlists:

• D.R. Horton, Inc. (DHI)
• Home Depot, Inc. (HD)
• iShares Residential Multisector Real Estate ETF (REZ)
• iShares Core U.S. REIT ETF (USRT) 
• KB Home (KBH)
• Lennar Corporation (LEN)
• LGI Homes, Inc. (LGIH)
• Lowe’s Companies, Inc. (LOW)
• NVR, Inc. (NVR)
• PulteGroup, Inc. (PHM)
• Real Estate Select Sector SPDR Fund (XLRE)
• Redfin Corporation (RDFN)
• Schwab US REIT ETF (SCHH)
• SPDR S&P Homebuilders ETF (XHB)
• Toll Brothers, Inc. (TOL)
• Vanguard Real Estate ETF (VNQ)

For updates on everything moving the markets, readers can also tune into TASTYTRADE LIVE, weekdays from 7 a.m. to 4 p.m. Central Time, at their convenience.

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Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to support@luckboxmagazine.com.