Housing market still improving

April housing starts rose almost 12% more than expected (1135K vs. 1015K), reaching a new post-recession high. This shouldn't have been too surprising, given the relatively strong readings of builder sentiment, as the chart above suggests. Housing starts are still only half what they were at the height of the boom, so it's reasonable to think that the housing recovery is still a long way from exhausting itself. We're likely to see slow but steady growth for years to come.

The housing recovery is also reflected in home prices, which are still comfortably below their 2005-2006 highs, both in nominal and real terms.

Mortgage rates are still very low from an historical perspective, adding significantly to housing affordability. Higher rates seem almost inevitable at this point, and that is likely to fuel housing demand as buyers rush to catch the train before it leaves the station.

Real yields on 5-yr TIPS (blue line in the chart above) are one of my favorite indicators, since they speak volumes about the bond market's sense of how strong the economy is. They have jumped some 170 bps in just over two years, and they are comfortably above the real yield on Fed funds. This suggests that the economy's growth fundamentals have improved substantially even as Fed policy remains accommodative. Nothing scary about this picture; expect more of the same in the months to come.