This article is brought to you by the Reschexpert blog, Rescheck Podcast, and users of https://www.rescheck.info. My thesis back in the early in 2000’s was on the effect of the Federal Funds Rate on New Home Construction starts. A basic recap without the 67 pages of bla bla bla would be that when the Federal Funds Rate increases it would be logical to assume housing starts slow. What my thesis proved was that the Fed can raise interest rates to a certain point and homeowners and homebuilders begin to get FOMO which for a short time creates a feeding frenzy in the home building industry. Think real estate bubbles and those times in your own community when 125k homes were selling for 250k, who knows, maybe that is today. These interest rate increase sparked construction rallies have a life cycle and eventually additional rate increases become detrimental. Today we want to discuss the stock market action after the latest Federal Interest Rate increase in December and the effects on New Construction and Reschecks.
On December 19 2018 the Fed raised interest rates 25 basis points. The stock market bottomed 5 days later on Christmas Eve. It is a fact that through all of 2018, which by the Rescheck National Construction Index would indicate the housing market was strong, the homebuilder etfs and sectors were tanking. To put it mildly they had a horrible year even compared to the general market. Why could this be? The argument we would make is that after multiple rate increases over a multi year period that housing starts finally stopped responding to the interest rate increases and housing starts finally started dropping after the first rate hike of 2018. The homebuilder etfs signaled this drop well before it was underway.
Is it possible that rates could continue to increase and housing starts will also find another leg up. Yes, anything is possible, however what my thesis showed is that after the initial drop in new housing starts following a multi year rate increase it can take some time to fully correct itself and reach the previous high levels. Stock markets and housing starts are ultimately gauges of human emotion and these emotions move in waves. When everyone is building and prices are high then everyone is ready to start their new construction, addition, or alteration project. The same way when the stock market reaches new highs everyone is more than ready to pump in money to by the newest growth stock or cryptocurrency. Subsequently the opposite happens when the cycle reverses. Selling begets for selling the market, and when home builders are shown on the nightly news struggling it chips away at the confidence of the prospective home buyer and gives them reason to sit on the fence and their cash for just one more month.
Overall I feel that housing starts in the United States are intrinsically connected to the U.S. stock market. Back when I was a project manager through the great recession it took great amounts of hustle just to maintain during lean years of 2007-2011 and even many years after that. I found that consumers down payments, monthly draws, and confidence were ultimately linked to how their nest egg was performing in their 401k and IRA. Needless to say that leaner times might actually boost the amount of home alterations and additions that you see in the Rescheck market where as faster markets see new home and condos being constructed in areas once thought inhabitable for outrageous prices people cannot wait to pay.
Whether you are an architect, engineer, home inspector, building inspector, or homeowner some portion of your project’s construction is or has been on the line in some form or fashion in the US stock market. The next time you see permits, Reschecks, and Manual Js being requested out of control take a look at were the Fed is during the current rate cycle. Then take a look at the publicly traded homebuilder ETFs to see how they are reacting to the rate increases or rate increases as a leading indicator. Finally, information from the Rescheck Construction Index can give you a nationwide look each month at what is happening on a real time basis.