In his summary of the economic State of the Union last week, President Bush rightly focused on the strength of the housing industry, a pillar of growth that shows no signs of weakening after a boom that has lasted for years.

The Census Bureau reported that housing starts rose in December to their highest level since 1984, surprising analysts who had expected a decline. Permits issued for new construction also rose, suggesting that 2004 will be nearly as strong as 2003, a year that by some measures was the best ever for the industry.

There are a number of reasons why housing is important. Approximately 66% of our nation’s economy is driven by consumer spending. Housing is a key component of the consumer budget. For the vast majority of Americans, a house will be the biggest consumer purchase of their life. An expenditure of $200,000 or more for a newly constructed home will inject many times that amount of spending, or aggregate demand, into our economy as it is multiplied and re-spent many times. The purchase of a new home also leads to the purchase of such consumer durables as appliances and furniture.

One of the stimulants to the current housing boom is our historically low interest rates. Since home and furnishing purchases often require vast amounts of debt, low interest rates stimulate this boom. Conversely, rising interest rates will choke off the boom and have a negative impact on the overall economy and the stock market.

According to demographic spending studies done by Harry S. Dent for his book, The Great Boom Ahead, the average age of the head of household when the first or starter home is purchased is 33. This implies that the last of the baby boomers, born in the late 1960s, are now buying their first homes.

Immigration also plays an increasingly important role in the housing market and the economy in general. Dent notes that immigrants to this country are generally younger and are here to earn a piece of the American pie—the most important slice being homeownership.

According to a FannieMae report, the number of immigrant households is projected to grow dramatically in the 21st Century, representing more than 1/4 of overall household growth—the factor that accounts for most new residential construction in the United States. The longer these immigrants live in the U.S., the more likely they are to purchase homes.

The report also notes that about 12 million new households will be formed in the next decade. Minorities and immigrants will make up about 2/3 of this growth. Immigrants see homeownership as an integral part of becoming an American and frequently rank buying a home as their number one financial priority.

After looking at this data and the economic impact the housing market has on the overall economy, it is understandable why a rise in interest rates would trouble the stock market. Anything that might slow homebuilding and household formations is not good for the economy.