In an unexpected turn of events, U.S. housing data came in very strong on Tuesday and the oil price took that news… poorly. Housing starts surged to a one-year high with an impressive 21.7% month-over-month increase. This would be assumed to be welcome news for anyone trying to gauge, or trade, the real economy, but oil prices were down with the news.
The global construction industry has long been recognized as a significant catalyst for oil demand. With the industry employing millions of people, the construction of new homes has traditionally propelled an increase in oil demand. Quite simply it represents lots of people, using lots of energy. Housing’s contribution to GDP, as estimated by the National Association of Homebuilders, lies between 15-18%, including both residential investment and consumption spending on housing services.
As one of the key indicators of economic health, the rise in housing starts usually signifies a robust economy. The recent jump in new home construction, however, is an atypical event as it is a massive increase during a period with some very weak data otherwise. It is driven largely by an unusual dynamic: rising interest rates have made relocation economically unattractive for current homeowners.
According to the national mortgage database, over 60% of U.S. mortgage holders have a rate below 4%, making the prospect of a new mortgage, with rates currently between 6 and 7%, significantly more costly. This dynamic has put a stranglehold on the supply of homes for sale, creating a pressing need for new construction to meet buyer demand.
The above driver is certainly unique to this period but at the same time, it shouldn’t be unwelcome news for energy demand. Given these developments, one might expect oil prices to be rising or at least remain stable on this type of day. However, oil prices have been on a downward trajectory. Economic analysts suggest that this decline can be attributed to concerns over the possibility of the Federal Reserve raising interest rates to curb an overheating economy. Data like this further reinforces the case for raising rates, as a one year high in housing starts will make officials nervous they aren’t doing enough on inflation. This concern has prompted traders to exercise greater caution, a move that is applying downward pressure on oil prices.
These recent trends illustrate a complex interplay where oil prices experience a lose lose. If economic data comes in weak then traders say this is the economic weakness they have been waiting for. This hasn’t been the case yet though, with some indicators still showing a lot of strength. The stronger the economy looks the more risk there is of another rate increase. The only thing that will break these cycles is successive large crude draws, which we may actually start to see this week based on the timing of the previous cuts.
