Lead Story… We are likely to read quite a bit in the coming months about the inherent conflict between higher interest rates resulting from economic growth/inflation and housing prices. Generally speaking, higher interest rates make mortgages more expensive, leading to less buying power and flattening or declining growth in home prices. Rates have soared on a relative basis (on a historical basis they are still extremely low) over the past month and a half or so. At the end of October, 30-year mortgage rates were roughly 3.5%. Today they are roughly 4.2%, an increase of 70 basis points or around 20%. On the surface this does not appear to to be good news for either the housing industry or home builders. However, it appears as if someone forgot to tell the builders who seem rather optimistic in their future prospects based on the latest NAHB Housing Market Index which measures builder sentiment. The index spiked 7 points this week to it’s highest level since 2005, the largest monthly increase in 20 years. From CNBC’ Diana Olick (Emphasis mine):
Of the index’s three components, current sales conditions increased 7 points to 76, sales expectations in the next six months rose 9 points to 78 and buyer traffic rose 6 points to 53. This is the first time buyer traffic has been in the positive since October 2005.
“Though this significant increase in builder confidence could be considered an outlier, the fact remains that the economic fundamentals continue to look good for housing,” said NAHB Chief Economist Robert Dietz. “The rise in the HMI is consistent with recent gains for the stock market and consumer confidence. At the same time, builders remain sensitive to rising mortgage rates and continue to deal with shortages of lots and labor.”
Mortgage rates have been on the upswing since the election, with the average rate on the 30-year fixed moving higher again Wednesday, after the Federal Reserve announced its expected quarter-point hike in the Federal Funds rate and that it would likely raise rates three times next year.
One important caveat here: historically, housing starts have tracked closely with builder confidence, as a more confident builder is more likely to acquire new sites on which to build more homes. However, this relationship broke down a bit when the market started recovering in the current cycle. Starts have still followed the HMI’s upwards trajectory but have done so at a slower pace as seen below. The most common explanation for this has been the labor shortage although there are several other factors at play as well such as more restrictive mortgage lending. The divergence has also likely been amplified by the fact that the index largely tracks smaller builders while big builders have largely increased market share during the recovery.
So, why is builder confidence surging in the face of higher interest rates? I think it’s due to four factors:
- Anticipation of accelerating wage and economic growth in the intermediate term
- An easing of regulatory burden in the banking sector that would favorably impact for A,D&C lending
- A reduction of construction and development regulatory burden in the near to intermediate term
- Looser credit restrictions and a scaling back of Dodd Frank which would increase mortgage credit availability, especially to those in the entry level market where the cost savings of owning over renting are greatest even with the increase in rates
Sure Thing: The Federal reserve hiked rates by 25 basis points this week. What happens next is a bit up in the air after the election and will be highly dependent on data. See Also: The 10 Year Treasury yield is now at it’s highest point in 17 months.
Showdown: Retailers reduced inventories in an effort to bolster prices this holiday season but shoppers are holding out for deals.
Going Dark: Big box retailers are winning a record number of property tax appeals by exploiting a loophole allowing them to tie their assessed valuation to sale comps, many of which are vacant.
Warning Signs? Rising mortgage rates could threaten housing demand in 2017 by hurting affordability and making people less likely to want to move up or down.
Reverse Course: Home prices are now rising faster than rents, reversing a trend that has been in place for several years.
Guessing Game: Housing Wire put together a roundup of housing industry predictions from Zillow, Redfin, Realtor.com, Kroll Bond Rating Agency and Bank of America, if you’re into that sort of thing. I’ll give you a quick spoiler: there are a lot of conflicting views among these “experts” so proceed with caution.
You’ll Shoot Your Eye Out, Kid: How Bob Clark’s A Christmas Story went from a low-budget fluke to an American Holiday tradition.
Chart of the Day
After 8 years, mortgage equity withdrawl as a percentage of disposable personal income is positive once again.
‘Tis the Season: Only in Florida could a woman at a Christmas parade get run over by a float.
What a Way to Go: A Russian woman was killed last week when she fell into a giant mixer of molten chocolate while allegedly trying to retrieve a mobile phone, because Russia.
Right of Passage: This compilation of kids crying on Santa’s lap is classic, especially for those of us with young kids.
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