US housing market continued to show strength,but may see drag after rate hike:Housing continues to b

Key data:

    September home sales continued to be on track overall; existing home sales rose from 5.3 mn to 5.5 mn, new home sales were down from 529k to 468k

    September housing starts accelerated from 1.132 mn (revised up) to 1.206 mn (2nd highest of year), though housing permits dipped from 1.161 mn (revised down) to 1.103 mn

    October NAHB housing index rose to the strongest level of the year, up from 61 to 64, mostly reflecting single family home strength

    3Q housing price index unchanged at 358.1, highest since 2008

    Housing market continues to be a bright spot in US economy, despite underperformance of consumption, as well as slowdown of exports and industrial production

    Comment:

    The housing market has been one of the key pillars of the US economy in 2015; though we saw some mixed data in September, there is still optimism surrounding the US housing market as we approach 2016.

    Home sales showed a mixed picture with existing home sales surging 4.7% MoM to the second highest level of the year. In contrast, new home sales not only declined but also saw last month’s strong data revised downward. The difference once again was driven by price; existing home prices fell 2.9% MoM to 222k, while new home prices rose 2.7% MoM to 297k, showing homebuyers remain highly price sensitive amid rising prices. Home sales remain volatile but overall remain on an upward trend, as pent up demand remains.

    Looking ahead, new construction of homes is set to continue on the same trajectory, as an increase of home starts was balanced out by a similar decline of permits. The NAHB index also showed some positive signs with expected single family buyers continuing to rise to the strongest levels since the financial crisis. Acceleration of housing construction should help support weak fixed investment.

    Monetary policy normalization is expected to create a headwind on the US housing market, as rising rates are expected to spillover to mortgage rates and increase the cost of purchasing; as we saw so far this year, home sales remain highly price elastic. With the housing price index nearly up to pre-crisis levels, there is some concern in the market the upcoming rate hike cycle may lead to a burst of the housing bubble. However, with lower leverage ratios (down from as high as 65% pre-crisis to about 40-45% today) and many choosing fixed rate mortgages, the housing market is less vulnerable to a rate hike shock. Consequently, we expect rate hikes to slightly drag the housing market but not create a major shock; with that said, the US economy will likely need to see other areas pick up in 2016 if it is to build upon the current recovery amid increasing global uncertainty.