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Why you should pay attention to the housing market, and what it says about the economy in 2020

Twenty/20

To gauge the direction of the economy and the stock markets in 2020, experts will be watching a host of indicators, including the unemployment rate and company earnings.

But there's another bellwether that's worthy of your attention, too: Housing data, including home sales and homebuilding. Even if you're not planning to buy or sell a home next year, what happens in the housing market could affect you as an investor and as a consumer — and as a person who feels the changes in the economy.

Here's what economists look at when it comes to housing data and what they expect next year could bring for the housing market.

Why housing is important to the economy

The economy is based on the principle of supply and demand, and one thing that everyone needs is housing. Whether you own a home or you rent one, housing is typically the single biggest expense in your or your family's budget. All told, the National Association of Home Builders estimates the housing industry makes up roughly 18% of gross domestic product (GDP) in the U.S., or the total value of all goods and services created in an economy.

For that reason, keeping tabs on home sales and homebuilding is a good way for experts to get a feel for what's happening in the economy. Reports on indicators like these can also move the stock market, as they can affect companies in various sectors.

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Home construction serves a couple of important purposes in the economy: It puts people to work, and it increases the supply of housing, which (in theory) should make renting or buying cheaper. Home sales, an adjacent indicator, provides additional insight into the economy. If home sales are up, that means more people can afford to buy houses — and that indicates they're employed, they have money to spend, and they feel confident that they can pay their mortgage for years to come.

"There are indirect benefits," too, says Scott Colbert, chief economist at Missouri-based Commerce Trust Company. When somebody buys a home, they also "go to Home Depot and buy new curtains," along with other furnishings.

But when it comes to what the housing industry is telling us for 2020, the signals are somewhat mixed.

What homebuilders and home sales tell consumers

Homebuilders are feeling confident heading into the new year, even though sales are slow.

The National Association of Home Builders/Wells Fargo Housing Market Index is at its highest level in 20 years, meaning that homebuilders are anticipating a busy year in 2020. The industry's confidence comes in part from three interest rate cuts in 2019, which lowered borrowing costs and made it easier for some consumers to buy a house.

In less positive news, sales were slow in 2019 and are expected to be slow again next year. As of the end of November, there were 1.66 million homes on the market nationwide, down 5.7% compared with November 2018 according to data from the National Association of Realtors.

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Real estate company Redfin projects that home sales in 2020 will hit an all-time low, in large part because people aren't moving nearly as much as they did in years past. A combination of high moving costs and increasing home values are keeping homeowners in place — owners don't want to sell as their homes increase in value and, by refusing to sell, they are further driving up prices by limiting supply.

New homes aren't being built fast enough, either, which also contributes to a shortage of properties. "We've under-built during this recovery," says Colbert. The number of new building permits is trending up, he says, which could indicate building will pick up next year, though.

Other experts concur. "We now expect single-family housing starts and sales of new homes to increase substantially," Fannie Mae chief economist Doug Duncan recently told CNBC.

What it all means for you

Heading into 2020, it's likely that home prices will remain high, despite renewed confidence from the housing industry. Consumers are still being squeezed by high housing costs, and that's likely to be the case this time next year.

If you already own a home, it may make sense to take advantage of the current low interest rates to refinance your mortgage to save money. And if you're looking to buy, there are steps you can take to prepare yourself for a purchase.

But housing is just one part of your household budget and one part of the economy. Nearly all of the other indicators are pointing toward another strong year for the economy in 2020. Businesses are feeling good, for one, and the trade war with China looks like it may be resolved, at least partially, next year. Overall, experts say, you can expect another year of growth.

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