Will the housing market continue to prop up the US economy?

Despite a recent drop in retail sales, softer business spending and a slowdown in job growth, the housing market keeps humming along. That’s good news for a US economy that may need housing to keep the current recovery alive.

The National Association of Home Builders reported last week that builder sentiment in October reached its highest level since February 2018. What’s more, the increase in sentiment so far this year is the biggest 10-month change in more than six years.

“With homebuilder sentiment so strong, it’s hard to imagine that the economy is on the cusp of a downturn,” said analysts at Bespoke Investment Group in a report.

Bespoke analysts also noted that while housing starts and building permit numbers for September showed a slight pullback from August levels, the decline — which was expected — was due mainly to a slowdown in multi-family apartment units, as opposed to traditional houses. Data on permits a year ago similarly showed that starts for single-family homes rose from August as well as September of 2018.

There seems to be no end in sight to the housing boom in many parts of the US. According to the Federal Reserve’s most recent Beige Book report, which looks at economic conditions in regions throughout the country, the Boston, Atlanta, Richmond, Chicago, Kansas City and San Francisco districts all have strong housing markets.

Low mortgage rates could get lower thanks to the Fed

The housing numbers dovetail with data that shows wages are growing at a rate higher than inflation and the unemployment rate is near a 50-year low.

“There is no better sentiment than people willing to make 30-year commitments for a home,” said JJ Kinahan, chief market strategist with TD Ameritrade. “When people have jobs, they are willing to spend money. The solid housing market is the side effect of a great job market.”

Low mortgage rates are helping to convince some renters, particularly younger millennials looking to start families, to take the plunge and buy homes. The average rate for a 30-year fixed mortgage is now just 3.69% according to mortgage financing company Freddie Mac. That’s down from about 4.5% at the start of 2019 and a multi-year peak of 4.94% last November.

Financing could get cheaper, too, if the Federal Reserve continues to lower interest rates, as many investors and economists expect. Lower rates could push the benchmark US 10-year Treasury yield, which influences mortgage rates, even lower.

Investors have taken notice. The S&P Homebuilders ETF, a fund that includes shares of top builders and other companies with a lot of revenue tied to the housing market, is up a stunning 38% this year.

Shares of home improvement retail giant Home Depot are up 38% this year as well, making them the second best performing stock in the Dow. Home Depot trails only Apple.

Housing related stocks are soaring

Alex Pettee, president of Hoya Capital Real Estate, which recently launched the Hoya Capital Housing ETF, said that he thinks concerns about the housing market needing to cool off are overblown — largely because of what has happened with the Fed and mortgage rates.

“The weakness we saw in housing in 2018 was about higher rates. So I’m not surprised to see a re-acceleration in the market this year, although it has happened a little more quickly than we thought. But last year was not reflective of an end of the cycle. It was a rate driven slowdown,” Pettee said.

He is encouraged that the strength for homebuilders has filtered down to companies like Home Depot and rival Lowe’s as well as homebuilding products and furnishing businesses like heating and cooling company Lennox, plumbing supplies maker Masco and flooring company Mohawk.

In fact, Lennox reported earnings Monday that were led by a 7% jump in residential heating and cooling sales and [a] 12% increase in profits. Both were third quarter records — and Lennox chairman and CEO Todd Bluedorn said on a conference call with analysts that it was heading into the last few months of the year with healthy momentum.

“The fourth quarter is off to a solid start and we look forward to a strong finish to the year. The residential market continues to look robust,” Bluedorn said.

Of course, the housing market’s momentum could grind to a halt if the trade war with China begins to take an even bigger toll on the US economy.

But so far, consumers are largely shrugging off the threat of more tariffs and other geopolitical uncertainties that have occasionally rattled investors this year. They continue to buy houses as well as home improvement goods to spruce them up.

“I’m an optimist on the economy. We’ve had this ugly litany of news flow — impeachment, Brexit, protests in Hong Kong. But it’s remarkable that the US is now heading into the eleventh year of expansion and ingredients are still in place for a good economy,” said Scott Clemons, chief investment strategist with Brown Brothers Harriman.