How a housing downturn could impact other sectors of the economy – Yahoo Finance

The housing market is starting to show signs of a slowdown. If the trend persists, the U.S could see an impact in other sectors of the economy starting with big-ticket items that go into furnishing a new home.

"The housing market is very much a leading indicator of the economy because of the knock on effects through the various sectors, like consumption of durable goods," Eric Basmajian, founder of EPB Macro Research, told Yahoo Finance.

He predicts durable goods such as large appliances that go into a home could cool off as fewer homes are sold.

Were going to see a cooling of new orders, and then we're going to see a pullback in industrial production or the manufacturing sector more broadly," said the researcher.

New orders for durable goods in March were up .4%, a slowdown from .6% in the prior month. Retail foot traffic compiled by SafeGraph and analyzed by Bloomberg for the 3rd week of May showed the sector with the biggest decline was home improvement and home furnishings, down 24.6% year over year.

The housing industry has already seen a substantial decline in number of sales and loan applications as 30-year mortgage rates shot up from around 3% at the end of last year, to current levels north of 5.25%.

If we see several more months of declines in housing data, including building permits and housing starts, that would be a very clear sign that the housing market is undergoing a slow down in volumes and that risks employment in the construction sector, said Basmajian.

I'd very much be on the lookout for employment in the construction sector, which would be a clear warning sign that a recession is right around the corner, he added.

As for the argument of not enough homes for buyers Basmajians viewpoint differs.

Most of the supply arguments are focused on single family homes, and that's sort of fighting the last battle. In 2005 and 2006, we had a significant overbuilding in single family homes. This economic cycle, we didn't overbuild single family homes, but we made a substantial new high in terms of the construction of multi-family, five-plus units, he said.

Story continues

People that are arguing tight supply are generally focused on single family homes. But when you look at total housing units, which would include, multifamily apartments and single family homes, the inventory numbers are actually quite high, he added.

How much the housing market could contract will depend "largely on how long and how forcefully the Federal Reserve tightens" monetary policy, says Basmajian.

This year the Federal Reserve began hiking interest rates and telegraphing quantitative tightening in an effort to combat red hot inflation.

If the Federal Reserve pivots in the next three months, we could maybe have a softer decline in the housing market. But if the Federal Reserve continues to tighten policy through the end of the year and into the middle of 2023 persistently contracting real money supply, then the probability of a severe decline in the housing market is likely. he added.

Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Instagram, YouTube, Facebook, Flipboard, and LinkedIn

See the original post here:

How a housing downturn could impact other sectors of the economy - Yahoo Finance