Don’t Let the Stock Market Get You Down

by Jonathan Smoke

The stock market’s roller-coaster ups and downs dominated the economic news this week, but don’t be fooled into thinking they indicate economic weakness.

Actually the stock market is experiencing a correction. These corrections are sometimes related to economic declines and other issues, but sometimes they occur independently and in the face of positive economic conditions – like now.

This stock market correction is more about company valuations and bad hedge fund bets. It is not indicative of the road ahead for housing, which is increasingly looking more positive, based on the following factors.

Key Factors Making the U.S. Economy Look Good

Construction: New construction data for September were positive and slightly better than expected. Starts and permits are back above 1 million. Year-over-year, the level of new construction is up 10% over 2013. That’s not a spectacular rebound, it’s positive, and the gains in new construction will lift the economy.

Retail: Earlier this week, the initial data for retail sales for September were disappointing with a 0.3% decline, but retail sales have been on a longer-term growth trend and remain up 4.3% year-over-year. The monthly reading is not very reliable; September’s slight decline is likely an anomaly. We’re expected to have a strong holiday season, and the current lower gas prices will help to ensure that.

Consumer sentiment: It seems like the consumer gets that the economy is indeed getting better despite the negative stock market performance this month. October consumer sentiment came in better than expected and better than September, for the highest level seen since 2007. More jobs, cheaper gas prices and lower interest rates are trumping stock market volatility.

Labor: Fundamentally, the economy and housing are on solid ground as the labor market continues to show strength. The weekly unemployment claims number was 264,000, the lowest number since the spring of 2000. The share of the labor force applying for unemployment has never been lower. This reinforces the view the labor market is improving and tightening, and the October employment figures are likely to be very strong.

The labor market is strong because the economy and, specifically, industrial production continue to grow. Industrial production rose 1% in September, which was higher than the consensus estimate.

Continued Positive Outlook

The outlook for the economy and housing is positive, as the core fundamentals are all gaining strength. Pent-up demand remains large for housing but is constrained by tight mortgage qualification requirements, and supply of both new and existing homes remain below normal levels. Confidence is high despite blips from the stock market correction and nervousness about global deflation and Ebola.

Continued improvement in employment will be main driver for a quickening pace of economic growth, and this will drive growth in home sales and new construction, which will reinforce the employment growth. That cycle should result in significant job gains in the months ahead along with improving incomes and gradually improving access to credit. In such a scenario, we should start to tap some of the pent-up demand that has been shut out of the housing market for the last several years.

We also now have two factors weighting the scales in our favor: substantially lower gas prices and 30-year mortgages rates below 4%.

Lower prices at the pump free up consumers’ money for spending, paving the way for a good holiday season. Fixed mortgage rates below 4% won’t last long, so they are the “last call” for qualified buyers to act on this rare opportunity. Plus, these lower rates provide a window for qualified owners to refinance and reduce their monthly housing costs.

These factors will support greater economic growth overall and lift sentiment even further, setting the stage for a strong 2015.

Source: Realtor.com