How Powerful is Housing?

I saw an interesting chart the other day where the author was comparing home sales and unemployment. The point was that given how large the housing market is and the “ripple” affect it has throughout the economy, changes in home sales lead unemployment. This is also similar to Kantrowitz’s “H.O.P.E.” framework.

Now be careful to note, the green line in the chart above has been flipped, so it’s saying that existing home sales have dropped (not increased) rather dramatically in the last couple of years. We know this of course because prices have skyrocketed and mortgage rates have climbed dramatically. The 1-2 punch has frozen existing homeowners, and transactions have plummeted to the lowest point since the 2008-2009 housing crisis.

Another charting note is there is a “lag” between the two data series. In the chart below, existing home sales has been shifted forward by ~1.5 years. If this timing holds true per history, we may start seeing unemployment tick up notably through the rest of the year.

It makes sense because there are so many industries and jobs tied to housing. Not only do you have construction and real estate sales, you also have furnishings which include big and small ticket items and the manufacturing and sales of those items. So when you get a dramatic drop in such an broad and influential industry, it’s not surprising to see a meaningful impact. (at least historically)

Will it happen this time?

Something else to consider is that “this time is different”. There is a laundry list of things that have just not happened (yet?) based on historical precedent. So it is possible that this seemingly clear and logical relationship may also breakdown. Maybe the government decides to keep hiring all the people that are being laid off. (which has been happening) Maybe unemployment breaks above 4% Friday and Congress decides to give everyone another check. Etc. Etc. Etc.

What I can say is that we have remained in an “abnormal” world for a lot longer than more distinguished and smarter people than I could have ever imagined. Further, many are arguing we are transitioning from a deflationary regime to another inflationary regime, which also has a plethora of implications in and of itself.

We really need to watch unemployment in the coming months, election or not. Some argue the numbers are being cooked and that may be true too. If they are, we may not be able to keep the true numbers hidden for much longer.