The mixed economic narrative continued with the housing market showing strong growth with a 16.9% increase in new home starts for December. On a seasonally adjusted basis, 1.608 million housing units were started which was the highest reading since December 2006 and above consensus forecasts of 1.375 million. November's figures were also adjusted higher.

It was the biggest month to month gain since October 2016 and totaled more than a 40% increase on a year over year basis. Overall for 2019, an estimated 1.290 million units were built which is a 3.2% increase from the previous year. Consensus forecasts are for a modest 2% bump in homebuilding this year. However, these December readings indicate that forecasts may need to be raised.

The strong housing data contrasts with middling industrial data which continues to show a lack of recovery despite the completed trade deal. Industrial sectors continue to be a drag on the economy and are now negatively contributing to overall growth and employment.

The strength in housing is offsetting this headwind. Some factors behind the strength are low mortgage rates, favorable supply and demand dynamics, labor market resilience, wage growth, and the strong household balance sheet. All of these factors don't seem likely to change for the next nine to fifteen months.

Mortgage rates have dropped steeply from November 2018 when the 30-year fixed-rate peaked at 4.94%. Currently, it sits at 3.65%. Therefore even though home prices have risen in the interim, affordability has increased as well due to lower financing costs.

Another reflection of the positive outlook for housing is evident in homebuilder confidence at multi-decade highs. It's a signal that housing has fully recovered from the devastating bear market in the previous decade due to excessive leverage and overbuilding. The elevated housing supply has been eaten through. Now due to many years of homes being built at a slower pace than population growth, any surge in demand could lead to serious undersupply issues and lead to more homebuilding activity.

One secular drag on housing has been lower household formation rates among millennials due to the lackluster economy and changing cultural mores. Housing demand could surge if these rates normalize. Of course, there's the possibility that these rates could rise at above-average rates to undo the years of depressed household formation as well which could lead to another explosive bull market in homebuilders and materials stocks.