“There’s no place like home!”

A fictional farm girl from Kansas uttered those famous words. The home also is dear to Wall Street’s heart. Housing trends exert a multiplier effect throughout the economy. The average American’s net worth has long been tied to home ownership.

For most Americans, the home is their major asset. When the housing market flourishes, so does the “wealth effect.” When people feel richer, they spend and invest more, triggering a virtuous cycle.

Housing sector reports are leading indicators and as such, they get close scrutiny from investors. Leading indicators provide early hints of economic trends, and stock market analysts clamor for any signal as to what the future may hold.

Never bet against the primal urge toward family formation and a home of one’s own. On that score, we just got some welcome news.

The U.S. Census Bureau reported Wednesday that housing starts in July increased 3.9% on a monthly basis, following the 11.7% decline (revised from -8%) posted in June (see chart).

This reading beat consensus expectations for growth of 2.7%. During the same period, building permits, which fell 3.7% in June, increased 0.1%. These positive trends occurred, despite elevated interest rates.

Released monthly, the government’s housing starts report represents the number of privately owned new houses, both single family and multiple unit homes and condos, on which construction has begun in a given period.

Meanwhile, home prices appear to have bottomed out, as tight supply combined with continued demand for homeownership drive prices higher again.

The National Association of Realtors (NAR) reported August 14 that home prices in over half of the U.S. racked up record price increases last quarter. Median home prices rose 8.5% in the second quarter to $402,600.

After the opening bell Wednesday, the main U.S. stock market indices were initially trading higher, but lost ground in the late afternoon after the Fed released the minutes of its July 25-26 meeting. The hawkish tone of those minutes spooked investors and stocks ended the day in the red, as follows:

• DJIA: -0.52%
• S&P 500: -0.76%
• NASDAQ: -1.15%
• Russell 2000: -1.28%

The transcript showed that most Fed officials last month still considered high inflation as a continuing risk that could require additional rate increases. Accordingly, the 10-year Treasury yield rose Wednesday, surpassing 4.26%.

Despite sharply falling inflation and indications that we could enjoy an economic soft landing, Fed Chair Jerome Powell and his cohorts seem intent on appearing tough. The concern among many analysts is that the central bank will wreak gratuitous damage to a fragile economy that’s already feeling the pressure of higher interest rates.

Despite those higher rates, consumers are keeping the U.S. economy chugging along. (So far, anyway.)

The overall real estate market is perking up, a positive macroeconomic sign. The real estate sector’s benchmark exchange-traded fund, the iShares U.S. Real Estate ETF (IYR), is off its bottom and hovering above its 50-day moving average. That suggests investors are betting the Federal Reserve will soon end its interest rate tightening cycle and housing will embark on a sustained recovery.

It’s also significant that do-it-your-self retailer Home Depot (NYSE: HD) reported quarterly results Tuesday that beat expectations. For the company’s second quarter, earnings per share (EPS) came in at $4.65 versus $4.45 expected. Revenue reached $42.92 billion vs. $42.23 billion expected. Home Depot is a bellwether not just for housing but for the overall economy.

On Wednesday, retail giant Target (NYSE: TGT) posted a big earnings beat that offset its revenue decline and reduced full-year profit outlook. TGT’s EPS came in at $1.80 vs. $1.39 expected; revenue was $24.77 billion vs. $25.16 billion expected.

Target posted its first quarterly sales drop in six years, due to a migration of bargain-conscious shoppers to cheaper stores, as well as the right-wing backlash against its “Pride Month” collection. However, over the long term, Target is poised for outsized growth as the economy recovers and ephemeral “culture war” politics subside.

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Signs of life in the housing market is one pillar shoring up the bull case. The others are falling inflation, an imminent end to Fed tightening, and recovering corporate earnings. Disinflation without recession is a powerful recipe for stock market gains.

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John Persinos is the editorial director of Investing Daily.

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