Is the housing recovery over?

In spite of happy news regarding US housing, I have been pretty negative about the sector’s overall prospects and it now seems the markets are corroborating this view. The chart above shows three series directly related to the US housing market; XHB, the SPDR S&P Homebuilders Index, $DJSHMB, the Dow Jones US Select Home Construction Index and $DJUSHB, Dow Jones US Home Construction Index. Each series is captured daily since May 13th, 2013. Each series demonstrates sharp falls over the period considered, specifically XHB -9.07%, $DJSHMB -18.63% and $DJUSHB -26.45%.

Homebuilders are generally considered a leading indicator of future house prices. If the share price of homebuilders are falling then it seems investors are pricing in a decrease in future sales. Markets can be considered effective predictors, due the fact they integrate the views of large numbers of disparate investors into specific prices.

And we’re seeing three other factors that collectively indicate housing prices are due to slow, and perhaps even reverse in the near term.

First, much of the activity is being driven by individual investors and hedge funds.

Second, spot prices of key commodities – copper and lumber – are falling. In a sustained recovery we’d expect to see the basic building block of housings – copper and lumber – rising not FALLING as demand increases.

And third, as illustrated in the chart below, interest rates are beginning to rise, potentially impacting any further increases in home prices. Over the period in question we’ve seen mortgage rates increasing by roughly 1%, from 3.51% to 4.57%. While this increase might appear modest a one percent rise appears to be just the start.

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