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US home builders increasingly optimistic

The US NAHB index (measure of home builders confidence) jumped to almost a 12 month high in September as home builders become increasingly optimistic on the US housing market. But is this optimism justified? And what are the implications?

1. NAHB index vs house prices

The chart shows home builders are the most optimistic they've been on the outlook since around pre-GFC times. This is coming on the back of the worst housing market downturn in recent history. In the release, NAHB said: “As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward,” said NAHB Chairman Ed Brady, a home builder and developer from Bloomington, Ill. “The single-family market continues to make gradual gains and we expect this upward momentum will build throughout the remainder of the year and into 2017.”

2. House price fuel indicator

But the question is, whether its sustainable... Burned by the 2008 experience many people now fear bubbles and actively search for them - and they find them a lot! The chart below combines jobs and income growth data with affordability data such as mortgage rates, and prices - this is designed to measure the housing market "fuel". Whenever this indicator is high you should expect house price gains as it implies consumers have ample fuel. If you see the indicator trending down while prices are trending up e.g. late stage of the mid-2000's housing bubble you should get justifiably concerned. At this point house prices are trending up and the indicator is in supportive territory. Thus the best guess is that house price gains are sustainable for now.

In terms of what it means for the outlook, the consumer sector has been the main source of strength for the US economy, and tided it over during the shale oil crash and dollar crunch that put some parts of the US economy into recession in the past year. A strong housing market is good for consumers (wealth effect, and housing related jobs), so this should underpin a virtuous cycle for housing and the consumer.

Thus in terms of underlying inflationary pressures you should expect more, not less, given the dynamics discussed above. This will put increasing pressure on the Fed, but it's still going to be a hard ask for the Fed to go prior to December given election related uncertainty and the still mixed nature of the data.

Bottom line: The increasing optimism in the NAHB survey about the outlook for the US housing market appears justified, the positive housing market dynamics increase the odds of another rate hike this year.

Also see the piece on China's property market - where price gains appear less sustainable, but like the US experience will ultimately have global implications...

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