Housing Supply Improves

The Mortgage Corner

Our housing supply is finally improving. New-home sales ran at a seasonally adjusted annual rate of 692,000, the Commerce Department said Tuesday. That was 4.5 percent above February’s total and beat the consensus forecast of a 645,000 rate.

It has taken this long for the housing market to recover from the housing bubble, when one million more homes were built than were needed. It was part of the too easy credit conditions that brought in home buyers that wouldn’t have qualified under more normal circumstances.

NAHB.org

For some context on how severe the current spell of under-building has been, take a look at new-home sales in 2000 or 2001. During those two years, well before the housing bubble started to inflate, Americans purchased 877,000 and 900,000 newly-constructed homes. In 2018, Americans purchased just 622,000, said MarketWatch’s Andrea Riquier.

“Sales of newly-constructed homes finally gained momentum after months in the doldrums. March’s selling pace was the strongest since November 2017, the month before the recent tax law changes took effect,” continued Riquier.

Meanwhile, existing-home sales retreated in March, following February’s surge of sales, according to the National Association of Realtors®. Each of the four major U.S. regions saw a drop-off in sales, with the Midwest enduring the largest sales decline last month. 

Total existing-home sales, https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 4.9 percent from February to a seasonally adjusted annual rate of 5.21 million in March. Sales as a whole are down 5.4 percent from a year ago (5.51 million in March 2018), said the NAR.

Lawrence Yun, NAR’s chief economist, anticipated waning in the numbers for March. “It is not surprising to see a retreat after a powerful surge in sales in the prior month. Still, current sales activity is underperforming in relation to the strength in the jobs markets. The impact of lower mortgage rates has not yet been fully realized.”

Rob Dietz, chief economist for the National Association of Home Builders, acknowledges that comparing the current housing economy to the one from two decades ago has some downsides. For one, the population isn’t growing nearly as fast now as back then. Still, the gulf between then and now is stark – and 2018’s anemic pace of construction follows several years of similar underbuilding.

“We think that based on demographic demand, we should probably be building 1.1 million single family homes this year,” Dietz told MarketWatch. “Our forecast is for less than 880,000 starts.” The NAHB prefers to look at starts, or groundbreakings, rather than sales data, to gauge market activity.”

For the first quarter of 2019, new home sales are running 1.7 percent higher than the first quarter of 2018, said Dietz. However, while sales were up 9.6 percent for the quarter in the South (the largest region), sales were down 5.9 percent in the West, 8.1 percent in the Midwest and 17.6 percent in the Northeast.

The March data reveal the challenge of housing affordability however, per Dietz and the NAHB. March sales grew at lower price points. For example, 50 percent of March 2019 new home sales were priced under $300,000. In March of 2018, only 39 percent of sales were priced under $300,000.

Harlan Green © 2019

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Housing Market Still Alive and Well!

The Mortgage Corner

Calculated Risk

The Mortgage Bankers Association said last week its Builder Applications Survey data for January showed mortgage applications for new home purchases jumped by 43 percent from December, though was unchanged from a year ago.  This should silence the doomsayers who predict labor shortages and higher tariffs are sure to kill the housing market.

"After two lackluster months, new home sales surged...in January to the fastest pace in our survey, dating back to 2013," said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. "Despite the jitters potential homebuyers felt in December from the volatility in the financial markets, the healthy job market and wage growth, moderating price gains and lower mortgage rates all helped home sales recover. Additionally, builders seem to be seeing improvement in their labor shortages, as recently released government survey data showed increases in construction hiring and openings in December."

Mortgage interest rates have indeed come down with a vengeance since December. The 30-year conventional fixed rate guaranteed by Fannie Mae and Freddie Mac is now 3.75 percent for a one-point origination fee, and the so-called high-balance conventional rate is 4.0 percent with one origination point for the most credit-worthy borrowers.

That’s why home builders’ confidence index jumped 4 points to 62 from 58 (percent of those surveyed), according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), which is also good news.

So housing construction isn’t about to die, which is a sign economic growth isn’t gasping for air either in this full employment, low-interest rate environment. February marked the second consecutive month in which all the HMI indices posted gains. The index measuring current sales conditions rose three points to 67, the component gauging expectations in the next six months increased five points to 68 and the metric charting buyer traffic moved up four points to 48.

“Builder confidence levels moved up in tandem with growing consumer confidence and falling interest rates,” said NAHB Chief Economist Robert Dietz. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5 percent in November to 4.4 percent this week. However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

There is more to the jump in builder confidence and new-home construction. The millennial generation is forming more new households this year, and at least 50 percent have historically wanted to buy a home. Researchers at the San Francisco Federal Reserve have been finding such an increase.

“The shares of young adults heading households now are similar to rates seen at the start of the housing boom,” said SF Fed researchers. “Moreover, while more young adults are living at home longer, data suggest they are continuing to transition to higher headship rates as they get older…Given current 12-month annual headship rates by age group, the Census Bureau projections imply household formations averaging on the order of 1.4 to 1.5 million per year through 2020. That is much better than an average of a little less than 900,000 annually over the past five years.”

MBA estimated new single-family home sales at a seasonally adjusted annual rate of 713,000 units in January, based on data from the BAS, an increase of 29.2 percent from the December pace of 552,000 units. On an unadjusted basis, MBA estimated 54,000 new home sales in January, an increase of 45.9 percent from 37,000 new home sales in December, a whopping increase.   

Conventional loans composed 68.7 percent of loan applications, FHA loans composed 18.6 percent, RHS/USDA loans composed 0.5 percent and VA loans composed 12.2 percent. The average loan size of new homes decreased from $334,944 in December to $334,532 in January.

The jump in finance applications and home building in January shouldn’t be surprising. The U.S. economy continues to perk along, seemingly ignoring any bad news, such as the just-released FOMC minutes of the December meeting that sees cloudier skies ahead for the U.S. and world economies this year.

Harlan Green © 2019

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Home Sales Rise for the Holidays

The Mortgage Corner

Econoday.com

Existing-home sales increased in October after six straight months of decreases, according to the National Association of Realtors. Three of four major U.S. regions saw gains in sales activity last month.

Lawrence Yun, NAR’s chief economist, says increasing housing inventory has brought more buyers to the market. “After six consecutive months of decline, buyers are finally stepping back into the housing market,” he said. “Gains in the Northeast, South and West – a reversal from last month’s steep decline or plateau in all regions – helped overall sales activity rise for the first time since March 2018.”

It’s really been almost a year (November 2017) since sales last peaked. And that was when interest rates had dipped to 4.0 percent for 30-year conforming fixed rates. So it is further evidence that sales are interest-rate sensitive, and homebuyers will wait for a dip in mortgage rates.

Today’s benchmark 10-year T Bond has fallen back to 3.06 percent, for instance, and the 30-year conforming fixed rate to 4.375 percent for those with the best credit scores.

It’s another manifestation of the flight to quality from a very unstable stock market worried about trade wars and outright wars, as the Trump administration stirs up the domestic and geopolitical temperatures again. Unilateral withdrawals from trade and Intermediate Nuclear Missile treaties do not hearten confidence this administration is interested in keeping the peace.

“Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 1.4 percent from September to a seasonally adjusted rate of 5.22 million in October. Sales are now down 5.1 percent from a year ago (5.5 million in October 2017), said the NAR.

This may be due to increased inventories of homes for sale, as Yun said. Buying has slowed, but new-home building has increased. Total housing inventory at the end of October decreased from 1.88 million in September to 1.85 million existing homes available for sale, but that represents an increase from 1.80 million a year ago. Unsold inventory is at a 4.3-month supply at the current sales pace, down from 4.4 last month and up from 3.9 months a year ago.

Econoday.com

Meanwhile nationwide housing starts rose 13.7 percent in October to a seasonally adjusted annual rate of 1.29 million units after a slight upward revision to the September reading, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest housing production reading since October 2016, when total starts hit a post-recession high of 1.33 million.

“We are seeing solid, steady production growth that is consistent with the National Association of Homebuilders forecast for continued strengthening of the single-family sector,” said NAHB Chief Economist Robert Dietz. “As the job market and overall economy continue to firm, we should see demand for housing increase as we head into 2018.”

Single-family production rose 5.3 percent in October to a seasonally adjusted annual rate of 877,000. Year-to-date, single-family starts are 8.4 percent above their level over the same period last year. Multifamily starts jumped 36.8 percent to 413,000 units after a weak September report.

Hurricane Michael hit Florida and Georgia in October though existing-home sales in the South nevertheless managed a 1.9 percent monthly rise. Sales in the West were strongest at plus 2.8 percent with the Northeast at plus 1.5 percent but the Midwest at minus 0.8 percent.

“(Existing-home) Sales may have gotten a boost from discounting as the median price fell 0.6 percent to $255,400, said Econoday. “Year-on-year, the median is up 3.8 percent which is sizably above the decline in sales which points to further discounting ahead.”

More price discounting and lower (not higher) interest rates and inflation may lie ahead, as real estate becomes the more dependable asset in such times of uncertainty.

Harlan Green © 2018

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It's Time to Build More Housing!

The Mortgage Corner

The National Association of Home Builders (NAHB) analysis of Census Construction Spending data shows that total private residential construction spending is soaring, as it rose to a seasonally adjusted annual rate (SAAR) of $520.9 billion in August, 0.5 percent up from downwardly revised July estimates.

But that’s not enough housing to satisfy current demand. There will be plenty of housing to replace, however, after this hurricane season has devastated so many U.S. states and territories.

Graph: NAHB.org

It was the fourth consecutive monthly increase after a dip in April, said the NAHB, Hurricane Harvey that made landfall late in August did not have significant impacts on construction spending in the same month, but will have a huge impact in months to come, as I said. The total private residential construction spending was 11.7 percent higher than a year ago. However, the blue line in the graph that represents residential construction spending still lags far behind commercial (red) and home improvement construction (gray lines).

The Midwest region is currently hurting the most from a housing shortage. Marketwatch’s Andrea Riquier reports the Home Affordability Index from real estate data provider Attom Data Solutions edged down to 100 in the third quarter, the lowest level since the third quarter of 2008, which was just as the financial crisis was taking hold.

Affordability is a problem because incomes haven’t risen as much as housing prices (especially in the Midwest). Attom notes that median home prices have risen 73 percent since bottoming out in 2012, while average weekly wages have increased only 13 percent in that time.

Why such a housing shortage so late in this recovery? For starters, the number of existing-homes listed for sale in 2017 to date is the lowest since 1999, according to the NAR. That’s in part because distressed sales volumes have fallen from more than 100,000 a month at the peak of the post crisis period, 2009-2012, to about 25,000 today, which means there aren’t many cheaply-priced homes left over from the housing crash.

And the construction industry because of a labor shortage has yet to catch up to soaring demand from a fully employed economy. More than half of the 3.5 million construction workers were laid off during the recession, and replacements are hard to find in this now fully employed economy.

Harlan Green © 2017

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Housing Shortage Continues

The Mortgage Corner

It was very good news that new-home sales rose nearly 3 percent in May to a 610,000 annualized rate. The report, always volatile, included a big upward revision to April which however, at 593,000, is still the year's low. But that isn’t close to the 1 million plus new homes built annually during the housing bubble.

Existing home sales also proved better than expected, up more than 1 percent to a 5.620 million rate. Low unemployment and low mortgage rates are major positives for housing. But that only exacerbates the shortage of homes on the market.

Graph: Econoday

And that doesn’t even take into account the 1 million prospective homebuyers who could buy a home, if Fannie and Freddie would ease their qualification standards to that which prevailed throughout the last 2 decades. But because the U.S. Treasury won’t release its stranglehold on supervision of the GSE’s, for fear that taxpayers might again be at risk if another housing bubble materializes, there is little prospect of this aid coming to first-time and entry-level buyers, in particular, that must then rely on the more expensive FHA alternative.

This is while the housing shortage continues, even though prices are up a median $252,800 for resales and $345,800 for new homes, a 6 percent rise, whereas household incomes are rising just 2.4 percent annually. The FHFA house price index is another of the week's highlights, up sharply in April to a year-on-year rate of 6.8 percent.

This should boost housing construction, but housing starts are also lagging. And we are hardly in bubble territory. Bubbles occur when there is too much of something—whether housing, or credit—so that the resulting oversupply causes prices to plummet at they did during the Great Recession.

Graph: Calculated Risk

Calculated Risk shows the “Distressing Gap” that occurred with the housing crash, when oversupply of distressed housing caused new-home construction to plummet. It hasn’t yet recovered, but “in general the ratio has been trending down since the housing bust, and this ratio will probably continue to trend down over the next several years,” says Calculated Risk’s Bill McBride.

The National Association of Home Builders reported builder confidence in the market for newly-built single-family homes weakened slightly in June, down two points to a level of 67 from a downwardly revised May reading of 69 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

New-home inventories remain too low to satisfy surging demand that comes from low interest rates and full employment. Full employment is a two-edged sword, however, as it also means labor shortages and unfilled jobs. Where are those workers, when just 2 million are currently employed in construction, and there were as many as 6 million employed during the housing bubble? It could be the recession hangover, such as memories from the housing crash that has discouraged many from re-entering the workforce. Hence the 4 percent drop in labor participation rate since the end of the Great Recession.

“As the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family sector,” said NAHB Chief Economist Robert Dietz.

Builders can’t keep up with the housing demand, in other words—especially now that the Millennials, those between the ages of 18 to 36, are coming into adulthood and outnumber all other population groups. A good percentage will want to own a home someday as their primary asset.

he younger baby boom generation dominated in 2010.  By 2016 the millennials have taken over.  “The six largest groups, by age, are in their 20s - and eight of the top ten are in their 20s,” reports Bill McBride and the U.S. Census Bureau. 

Harlan Green © 2017

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Low interest Rates Boost Housing Construction

The Mortgage Corner

Housing starts returned to trend, reports the National Association of Home Builders, dropping 2.6 percent to a seasonally adjusted annual rate of 1.246 million units, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Multifamily production fell 10.2 percent to 423,000 units after an unusually high December 2016 reading, whereas single-family starts ticked up 1.9 percent to 823,000 units.

But year-on-year both components are very positive, up 6.2 percent for single-family homes and at a very strong 19.8 percent for multi-units. And with interest rates still at historical lows, 2017 should be a very good year for new-home starts and sales.

Graph: Calculated Risk

“Some pull back in housing production is unsurprising after an overly strong multifamily reading last month,” said NAHB Chief Economist Robert Dietz. “As we move forward in 2017, we can expect the multifamily sector to continue to stabilize and single-family production to move forward at a gradual but consistent pace.”

Regionally in January, combined single- and multifamily housing production rose 55.4 percent in the Northeast and 20 percent in the South. Starts fell by 17.9 percent in the Midwest and 41.3 percent in the West, where skyrocketing housing prices have slowed sales.

Speaking of the western region, the California Association of Realtors reports rising wages and seasonal price declines held California’s housing affordability steady in fourth-quarter 2016, even while interest rates rose moderately.

The percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California in fourth-quarter 2016 remained at 31 percent, unchanged from the third quarter of 2016 but was up from 30 percent in fourth-quarter 2015, according to C.A.R.’s Traditional Housing Affordability Index (HAI).

This is the 15th consecutive quarter that the index has been below 40 percent and is near the mid-2008 low level of 29 percent. California’s housing affordability index hit a peak of 56 percent in the third quarter of 2012, when both housing prices and interest rates were lower.

I project that mortgage rates will remain low, in what is becoming an interesting anomaly. Mortgage rates have fallen of late, while Treasury bond yields have been rising in anticipation of rising inflationary pressures if Republicans do increase federal spending.

Per Market Watch, Sean Becketti, chief economist of Freddie Mac, said something unusual is going on — the 30-year mortgage isn’t moving in line with the yield on the benchmark 10-year Treasury, as it has for the past 46 years.  Since Dec. 29, the 30-year has dropped 17 basis points, but the yield on the 10-year bond has stayed the same, he says. “While we expect mortgage rates to fall into line with Treasury yields shortly, this just may be a year full of surprises,” he said.

Mortgage rates slipped for a second week even as they retain most of the rise since Donald Trump was elected president, but not much. The 30-year fixed conforming rate is still at 3.75 percent for 1 origination point, 4.0 percent with no origination points.

Why? Banks are flush with cash and investors are snapping up mortgage-backed securities in search of higher yields. And while Fannie Mae and Freddie Mac continue as US Treasury wards, they provide as much security as Treasury bonds, but with a much better yield.

Just do the numbers—30-year Treasury yields have hovered around 3 percent, vs. 3.75 to 4 percent yields on Fannie and Freddie mortgage-backed securities.But the future of Fannie and Freddie are not certain. New Treasury Secretary Steven Mnuchin has said he would like to see the GSEs privatized. Economists have predicted that if that happened it could raise mortgage rates from 0.4 to as much as 1 percent.

That’s how valuable even an implicit government guarantee of such securities means, since banks would demand higher yields to be part of such a market. And let us not even try to imagine what life would be like for homeowners if Fannie Mae and Freddie Mac disappeared. They are responsible for more than 60 percent of all home mortgage originations at present.

Harlan Green © 2017

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New-Home Sales, Confidence Also At New Highs

The Mortgage Corner

Just as existing-home sales are at their cyclical highs, the Commerce Department on Friday said new home sales increased 5.2 percent to a seasonally adjusted annual rate of 592,000 units last month. That was the second highest pace since 2007, said the NAHB. Economists had forecast single-family home sales, which account for about 9.5 percent of overall home sales, rising 2.1 percent to a 575,000-unit rate last month.

Graph: NAHB

The real problem is still lack of inventory with just 5.1 months of available supply (red line in graph), but builders optimism is the highest since 2005 that they can increase that inventory with a better mix of more affordable housing. Sales rose 16.5 percent from a year ago, boosted by a 43.8 percent jump in the Midwest to a nine-year high. Sales surged 7.7 percent in the West, their highest level since January 2008, but fell 3.1 percent in the South. They were unchanged in the Northeast.

“NAHB expects an increase in single-family home construction next year, fueled by a growing economy and solid job growth,” said NAHB Chief Economist Robert Dietz. “Moreover, builder confidence has risen on anticipation of reductions in regulatory costs, which is good news for home buyers and renters. However, the pace of construction will continue to be restricted by shortages of lots and labor in some markets.”

And consumers are feeling much more confident since the November elections, with most of the jump in older respondents to both the University of Michigan and Conference Board surveys. They are putting a lot of faith that Prez-elect Trump will be able to carry out his election promises of draining the Wall Street/DC swamps, in other words.

Graph Econoday

That said, the U. of Michigan consumer sentiment index edged up to a reading of 98.2 from 98 earlier this month. That was the highest reading since January 2004. And the Conference Board’s confidence index is up 12.9 points since the November election in gains driven by older consumers, as we said. The level for December is 113.7 which is the highest reading since way back in August 2001.

The University of Michigan said a record 18 percent of respondents "spontaneously mentioned the expected favorable impact of Trump's policies on the economy." Consumers anticipated that a stronger economy would create more jobs, with the share expecting higher income rising to a one-year high.

And personal incomes are rising at a 4 percent clip, the unemployment rate has dropped to 4.6 percent, and GDP growth is now up to 3.5 percent in the third revision to Q3 growth, with fourth quarter GDP growth also looking good.

So why shouldn’t consumers feel more confident of the future? It has a lot to do with Republican policies in Congress, yet Repubs say they want to repeal much of Obama’s legacy, which created the recovery from the Great Recession—the worst recession since the Great Depression. And a repeal of Obamacare and Dodd-Frank, the law that is attempting to reign in some of the excesses that caused the Great Recession, could put US back into another recession.

In other words, those voters need to be careful of what they wish for beyond the Twitters of Prez-elect Trump.

Harlan Green © 2016

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A Record Year For Mortgages?

The Mortgage Corner

First quarter mortgage numbers are in, and we could be having a very good year for mortgage originations, says Equifax, among others. According to Equifax’s report, the total dollar amount of first-mortgage originations during the first quarter of the year was $450.5 billion, which represented a year-over-year increase of 12.3 percent, the highest amount for a first quarter total since 2013.

And privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,189,000, according to the US Census Bureau, which will create future demand for mortgages when completed. This is 4.8 percent above the revised May estimate of 1,135,000, but is 2.0 percent below the June 2015 rate of 1,213,000.

Graph: Econoday

Single-family housing starts in June were at a rate of 778,000; it is 4.4 percent above the revised May figure of 745,000. The June rate for units in buildings with five units or more was 392,000. But starts are still not keeping up with demand, with soaring rental rates and falling vacancy rates in most metropolitan areas, a sign of a very tight—and expensive—rental market, which has to motivate many renters to become homebuyers.

Graph: Freddie Mac

No wonder, as the 30-year conforming fixed rate has dropped to as low as 3.0 percent for a 1.25 point origination fee in California on primary residences, as long as borrowers’ so-called ‘tri-merge’ mid-credit scores are above 740. This is the lowest rate since WWII, and such low rates are projected to continue through the fall, at least, according to Freddie Mac

Why? It’s fairly easy to understand, as Britain’s Brexit vote showed that the Eurozone may be a European Union in name only. The resultant uncertainty is causing a flight to safe haven investments, and US stocks and bonds provide the ultimate safe haven with US growth picking up while other countries show little or no growth.

Also, builder confidence in the market for newly built, single-family homes in July held, falling just one point to 59 from a June reading of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released on Monday.

“The economic fundamentals are in place for continued slow, steady growth in the housing market,” said NAHB Chief Economist Robert Dietz. “Job creation is solid, mortgage rates are at historic lows and household formations are rising. These factors should help to bring more buyers into the market as the year progresses.”

Graph: NAHB

Who will those future homebuyers be? First-time homebuyers now make up some 32 percent, according to the NAR. And Lawrence Yun, NAR chief economist, says although millennials have made up the largest share of buyers for three consecutive years, sales to first-time buyers and the homeownership rate for young adults under the age of 35 remain depressed at levels not seen in decades. This is despite historically low mortgage rates, escalating rental costs and low unemployment levels among those with a college education. 

“Even with potentially higher incomes, prospective millennial homebuyers residing in some of the most expensive cities in the country face the onerous task of paying steep rents while trying to save for an adequate down payment,” he said. “However, for those currently living in or looking to move to a more affordable part of the country, there are metro areas right now with solid job growth and that offer a smoother path to homeownership.”

So affordability will continue to be the main obstacle to homeownership, as well as historically heavy student debt loads for those same millennials, unless future Congresses will make public colleges in particular tuition-free, a benefit which all developed and many emerging countries already offer their young citizens.

Harlan Green © 2016

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Housing Affordability, Consumer Sentiment, Improving

The Mortgage Corner

Spurred by a modest reduction in mortgage interest rates and favorable home prices, nationwide housing affordability in the first quarter of 2016 posted a slight increase, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) released today.

"This is the second consecutive quarter that we've seen a nationwide improvement in affordability due to favorable home prices and mortgage rates," said NAHB Chief Economist Robert Dietz. "These factors, along with rising employment, a growing economy and pent-up demand will provide a boost for home sales in the second half of 2016."

Is this causing the spike in consumer sentiment? Consumer sentiment is absolutely soaring so far this month, in the opinion of Econoday, up nearly 7 points to 95.8 for the mid-month flash. This is the best reading since June last year.

Graph: Econoday

Expectations, which have been pulling down the headline index most of this year, jumped nearly 10 points to 87.5. The month-to-month turnaround for this reading is the best of the cycle, since 2006. Current conditions are also moving higher, to 108.6 from 106.7.

In all, 65 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $65,700. This is up from the 63.3 percent of homes sold that were affordable to median-income earners in the fourth quarter.

The national median home price fell from $226,000 in the fourth quarter to $223,000 in the first quarter. Meanwhile, conforming 30-yr fixed mortgage rates are still as low as 3.25 percent in California, and 3.375 percent for a Hi Balance conforming fixed rate with a 1 pt. origination fee.

Harlan Green © 2016

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Construction Leads Housing, GDP Recovery

The Mortgage Corner

Pending home sales are still rising. And that’s in large part because both residential and non-residential commercial construction is in fact soaring. The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2015 was estimated at a seasonally adjusted annual rate of $1,083.4 billion, 0.7 percent above the revised June estimate of $1,075.9 billion. The July figure is 13.7 percent above the July 2014 estimate of $952.5 billion.

Graph: Calculated Risk

This is huge, and another sign that housing this year may keep average U.S. GDP growth above 3.5 percent for the rest of 2015 and beyond, as the just revised Q2 growth rate of 3.7 percent is indicating. Housing has been the sluggard as a growth component in this recovery to date, but 2015 looks like the year that it breaks out.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.5 percent to 110.9 in July from an upwardly revised 110.4 in June and is now 7.4 percent above July 2014 (103.3). The index has increased year-over-year for 11 consecutive months and is the third highest reading of 2015, according to the National Association of Realtors.

On a year-over-year basis, private residential construction spending is up 16 percent. Non-residential spending is up 18 percent year-over-year, and public spending is up 6 percent year-over-year, reports Commerce.

That’s also why newly built, single-family home sales rose 5.4 percent to a seasonally adjusted annual rate of 507,000 units in July, according to HUD and the U.S. Census Bureau.

“This report is in line with other government data and improving builder sentiment and shows a gradual but consistent housing recovery,” said NAHB Chief Economist David Crowe. “As job growth and consumer confidence continue to strengthen, the housing market should make additional gains this year.”

Economists had forecasted gross domestic product would be revised up to 3.3 percent in Q2, but business investment was stronger than expected. Business investment helped, but it was consumers, buoyed by low interest rates and inflation boosting their confidence in future jobs and rising incomes that got them spending again.

The Commerce Department said investment in nonresidential structures was revised to show an increase rather than a contraction, reflecting stronger spending on commercial and healthcare construction. Spending on residential construction, which includes brokers' commissions, was also raised from 6.6 to 7.8 percent. More gains are likely this quarter after the Pending-Home sale report showed an increase in contracts to purchase previously owned homes (i.e., existing-homes) in July.

The large spending uptick on private construction was at a seasonally adjusted annual rate of +1.3 percent (±1.0%). Residential construction was at a seasonally adjusted annual rate of $380.8 billion in July, 1.1 percent (±1.3%). Nonresidential construction was at a seasonally adjusted annual rate of $407.0 billion in July, 1.5 percent (±1.0%).

This can only mean more jobs are being created in construction and Professional Services in the upcoming Friday unemployment report. More good news for U.S. jobs growth, in other words.

Harlan Green © 2015

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Housing Construction Soars

The Mortgage Corner

Housing construction is taking off, as I predicted two weeks ago. The numbers show actual construction starts accelerating as well as building permits for future construction. It is also boosting builder confidence to a level that signals continued growth in new construction.

As Econoday reported, “Don't let the headline fool you (i.e., slight drop in June), the housing starts & permits report points to solid strength for the housing sector.” Though the Calculated Risk graph shows how far the housing market is from a true recovery. It is only now returning to the lows of the 1990 recession.

Graph: Calculated Risk

Housing starts came in at a 1.036 million rate in May, down 11.1 percent from the April rate but the April rate, which was already one for the record books, is now revised higher to 1.165 million, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April.

And builder confidence in the market for newly built, single-family homes in June rose five points to a level of 59, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since September 2014, and in fact returns the index to pre-bubble (2001-02) levels.

Graph: Calculated Risk

“The HMI indices measuring current and future sales expectations are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead,” said NAHB Chief Economist David Crowe. “At the same time, builders remain sensitive to consumers’ ability to buy a new home.”

All three HMI components posted healthy gains in June. The component gauging current sales conditions jumped seven points to 65, the index charting sales expectations in the next six months increased six points to 69, and the component measuring buyer traffic rose five points to 44, said the press release.

Why the huge construction increase in June? This is while mortgage rates are rising, up some 0.375 percent since their most recent lows to 3.875 percent for 0 points in origination fees for a 30-year fixed rate conforming loan. Firstly, it means consumers are confident enough in their future to begin to look for housing to support their growing families.

And this is, of course, the millennial generation aged 18 to 36 years that has already surpassed their parents’ baby boomer population size, and will exceed it by 2020, according to demographers.

Graph: CNBC

Also, household formation is finally returning to normal levels of 1 million plus new households being formed per year, as the so-called echo boomers move out of their parents’ homes and or leave college to make their own nests.

Household formation has been unusually low over the past seven years, averaging 577,000 new households. Whereas, there are approximately 15 million new households per decade being formed during normal times.

So, "there's a ton of people living in basements," Tommy Lee of Fundstrat Global Advisors said in an interview with CNBC's "Trading Nation." "Two quarters of pretty decent household formation isn't getting everybody out of the basement. I think this means we have multiple years where household formations are well over 1.3 million, 1.4 million."

Forecasters will be revising their second-quarter GDP estimates higher following today's report, says Econoday, not to mention their estimates for Thursday's index of leading economic indicators where permits are one of the components.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

2015 Housing Construction Will Surge

The Mortgage Corner

We believe housing construction is about to bloom this spring, due to growing employment. For starters, an additional 45,000 construction jobs were added to nonfarm payrolls in April. This is even though construction spending to date has been flat, according to the Commerce Department. The U.S. Census Bureau of the Department of Commerce announced that construction spending during March 2015 was estimated at a seasonally adjusted annual rate of $966.6 billion, 0.6 percent below the revised February estimate of $972.9 billion. But the March figure is 2.0 percent above the March 2014 estimate of $947.3 billion.

And sales of new single-family houses in March 2015 were at a seasonally adjusted annual rate of 481,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development, which is slow because of winter weather, but it is still 19.4 percent above last year’s March 2014 estimate of 403,000.

And, housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,039,000, 5.7 percent below the revised February rate of 1,102,000, but is 2.9 percent above the March 2014 estimate of 1,010,000, signaling more construction ahead. And the single-family component is up 4.4 percent from February, which is double the multi-family component. Single family construction employs many more workers per unit.

This is while overall employment could be returning to pre-recession levels, as we said last week. The U.S. churned out 223,000 new jobs in April, and the unemployment rate slid to 5.4 percent from 5.5 percent, which means the US economy’s deep freeze was temporary. It was a short hibernation, in a word, but we are still not out of the Great Recession woods, as we said last week.

Graph: Marketwatch

The Small Business Optimism Index also increased 1.7 points from March to 96.9, reports the NFIB, with the employment component especially strong. Small business does 50 percent of all hiring, so this is another sign of a healthy jobs market. Twenty-seven percent of all owners reported job openings they could not fill in the current period, up 3 points from March. And a net 11 percent plan to create new jobs, up 1 point and a solid reading.

Graph: Calculated Risk

Lastly, the Labor Department’s most recent JOLTS report showed 5 million job openings, and a higher Quits rate, meaning more workers were able to quit their current job to find a better position. Quits are up 14 percent year-over-year. These are voluntary separations, as we said (see light blue columns at bottom of graph for trend for "quits"), and the number of job openings are up 19 percent YoY, which is another sign of a robust jobs market.

The bottom line is housing construction should begin to expand in the spring and summer. This will ultimately relieve the problem of lack of inventory, and should help first time homebuyers by relieving price pressures that have been increasing as housing stocks have declined.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

January Existing Home Sales, Mortgage Applications Dip

The Mortgage Corner

Oh, the winter freeze! It seems to put the housing market into a deep freeze, as well. Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 4.9 percent to a seasonally adjusted annual rate of 4.82 million in January (lowest since last April at 4.75 million) from an upwardly-revised 5.07 million in December, said the NAR. Despite January’s decline, sales are higher by 3.2 percent than a year ago.

Lawrence Yun, NAR chief economist, says the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country. “January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows,” he said. “Realtors® are reporting that low rates are attracting potential buyers, but the lack of new and affordable listings is leading some to delay decisions.”

Graph: Calculated Risk

Better news was that the Chicago Fed National Activity Index (CFNAI) edged up to +0.13 in January from –0.07 in December, with industrial production up. Three of the four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

Total existing-home inventory at the end of January increased 0.5 percent to 1.87 million existing homes available for sale, but is 0.5 percent lower than a year ago (1.88 million). Unsold inventory is at a 4.7-month supply at the current sales pace – up from 4.4 months in December. The median existing-home price for all housing types in January was $199,600, which is 6.2 percent above January 2014. This marks the 35^th consecutive month of year-over-year price gains.

This follows the Conference Board’s LEI, which slowed to a not-so-strong plus 0.2 percent versus a slightly downward revised plus 0.4 percent in December. Once again the yield spread is the biggest positive for the index reflecting the Fed's near zero rate policy. Consumer expectations are the 2nd largest positive in the month, though one that may reverse in the next report given last week's plunge in the consumer sentiment index. Credit indications, which continue to be very positive in this report, are the 3rd largest positive.

Both indexes show increased employment in 2015, which should mean home sales will pick up with the selling season and better weather in the spring. “Although sales cooled in January, home prices continued solid year-over-year growth,” adds Yun. “The labor market and economy are markedly improved compared to a year ago, which supports stronger buyer demand. The big test for housing will be the impact on affordability once rates rise.”

Real estate is showing more signs of life, with the Case-Shiller Home Price Index rising again. Data released for December 2014 shows a slight uptick in home prices across the country. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.6 percent annual gain in December 2014 versus 4.7 percent in November.

Graph: Calculated Risk

Nine cities reported monthly increases in prices ... Both the 10-City and 20-City Composites saw year-over-year increases in December compared to November. The 10-City Composite gained 4.3 percent year-over-year, up from 4.2 percent in November. The 20-City Composite gained 4.5 percent year-over-year, compared to a 4.3 percent increase in November.

Graph: US Census Bureau

And lastly, January new-home sales were unchanged, but prices rose. Sales of new single-family houses in January 2015 were at a seasonally adjusted annual rate of 481,000, which is not enough product to keep prices in the affordable range. This is 0.2 percent below the revised December rate of 482,000, but is 5.3 percent above the January 2014 estimate of 457,000.

“In a promising sign, new home sales have been trending at post-recession highs for the past two months,” said NAHB Chief Economist David Crowe. “As the economy strengthens and mortgage rates remain low, we can expect continued upward movement in the housing market this year.”

So still record low interest rates (i.e., 3.50 percent conforming fixed rates) are keeping homebuyer and refinancers interested, but not enthusiastic.   And we believe mortgage rates will remain low, as evidenced by Fed Chairwoman Janet Yellen’s latest congressional testimony, which hinted that said rates could remain low for much of this year.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Housing Starts, Builder Optimism Dips

The Mortgage Corner

Nationwide housing starts fell 2 percent to a seasonally adjusted annual rate of 1.065 million units in January, according to newly released data from the U.S. Commerce Department. This drop was mainly due to a 22.2 percent decrease in the Midwest, hit hard by winter weather.

And home builders’ sentiment also fell slightly from 57 to 55 percent, meaning a majority of those surveyed are optimistic that 2015 will be a good year for housing construction.

Graph: Calculated Risk

Single-family housing production fell 6.7 percent to a seasonally adjusted annual rate of 678,000 in January while multifamily starts rose 7.5 percent to 387,000 units. This is 2.0 percent below the revised December estimate of 1,087,000, but is 18.7 percent above the January 2014 rate of 897,000.

"After a strong single-family report in December, it is not surprising to see some pull back in January," said NAHB Chief Economist David Crowe. "With continued job creation and a growing economy, single-family production should make gains in the year ahead."

Graph: Calculated Risk

Though builder sentiment dipped, it was very good for a winter report.
“For the past eight months, confidence levels have held in the mid- to upper 50s range, which is consistent with a modest, ongoing recovery,” said NAHB Chief Economist David Crowe. “Solid job growth, affordable home prices and historically low mortgage rates should help unleash growing pent-up demand and keep the housing market moving forward in the year ahead.”

So what does this say about housing in 2015? The Fed’s FOMC minutes were just released, and it looks like they might not be ready to raise interest rates in the middle of 2015, as had been hinted by several of the Fed Governors.

“In connection with the risks associated with an early start to policy normalization, many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee's objectives of maximum employment and 2 percent inflation,” said the minutes. “In addition, an earlier tightening would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound.”

Why is the Fed becoming more dovish viz interest rates? The Producer Price Index for wholesale prices is hovering perilously close to deflation. The PPI — a good proxy for wholesale costs — fell a record 0.8 percent in January on a seasonally adjusted basis, the Labor Department said today. It was the third decline in a row and the fifth in the past six months.

This is big news, folks, and could mean mortgage rates would remain low much longer than originally projected.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New-Home Construction, Builders’ Optimism Still Rising

The Mortgage Corner

Home builders’ optimism is still high, though builder confidence in the market for newly built single-family homes fell one point in December to a level of 57 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), following a four-point uptick last month.

Graph: Calculated Risk

“After a sluggish start to 2014, the HMI has stabilized in the mid-to-high 50s index level trend for the past six months, which is consistent with our assessment that we are in a slow march back to normal,” said NAHB Chief Economist David Crowe. “As we head into 2015, the housing market should continue to recover at a steady, gradual pace.”

What is helping new-home demand is the lack of existing-home inventory. Total housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – the lowest since March (also 5.1 months).

Meanwhile, new-home construction that would replenish housing inventories is advancing in fits and starts, largely due to uncertain weather conditions and still tough mortgage qualification standards that lenders have only recently begun to ease. Privately-owned housing starts in November were at a seasonally adjusted annual rate of 1,028,000. This is 1.6 percent below the revised October estimate of 1,045,000 and is 7.0 percent below the November 2013 rate of 1,105,000.

Single-family housing starts in November were at a rate of 677,000; this is 5.4 percent below the revised October figure of 716,000, but double the number of multiple units being started. The November rate for units in buildings with five units or more was 340,000.

Graph: Calculated Risk

Another reason for builders’ optimism and healthy new-home construction is the pickup in U.S. employment. Private non-farm payrolls increased 321,000 in November and the jobless rate held at 5.8 percent. The competition for jobs is also dropping, with just 1.9 unemployed workers looking for work per job opening, when it was as much as 4 workers per job opening just after the Great Recession.

Also, prospective borrowers may find it easier to get a loan in 2015 as some lenders, encouraged by federal regulators, ease standards. In addition, mortgage rates are still low, enabling qualified borrowers to get relatively cheap loans. For example, 30-year fixed rate conforming mortgage rates with as little as 5 percent down have dropped to 3.50 percent in California.

Another reason for the better job numbers is industrial production increased 1.3 percent in November after edging up in October. In November, manufacturing output increased 1.1 percent, with widespread gains among industries. The rise in factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. It is up 13.2 percent from its low point in 2009, according to Calculated Risk.

NAR also recently released its economic and housing forecast for 2015 and 2016. NAR chief economist Lawrence Yun is forecasting existing-home sales this year to fall slightly below 2013 (5.1 million) to 4.9 million, and then increase to 5.3 million next year and 5.4 million in 2016. Yun expects the national median existing-home price to rise 4 percent both next year and in 2016.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Pending and New-Home Sales Looking Up

The Mortgage Corner

Sales of new single-family houses are barely budging from their recession lows. But pending home sales for September nudged up to the highest this year, which is a sign that record low interest rates are bringing buyers back into the market.

Pending sales rose slightly in September and are now above year-over-year levels for the first time in 11 months, according to the National Association of Realtors.

The Pending Home Sales Index inched 0.3 percent to 105.0 in September from 104.7 in August, and is now 1.0 percent higher than September 2013 (104.0). The index is above 100 for the fifth consecutive month and is at the second-highest level since last September, reports the National Association of Realtors.

Lawrence Yun, NAR chief economist, says moderating price growth and sustained inventory levels are keeping conditions favorable for buyers. “Housing supply for existing homes was up in September 6 percent from a year ago, which is preventing prices from rising at the accelerated clip seen earlier this year,” he said. “Additionally, the current spectacularly low mortgage rates should help more buyers reach the market.”

Despite improved housing conditions and low interest rates (as low as 3.625 percent for the conforming 30-yr fixed rate today), tight credit conditions continue to be a barrier for some buyers. Of the reasons for not closing a sale, about 15 percent of Realtors in September reported having clients who could not obtain financing as the reason for not closing.

Yun says the final rule on Qualified Residential Mortgages should improve access to credit once it goes into effect next year. “The rule provides clarity for lenders and is a win for creditworthy consumers by ensuring they continue to have access to safe and affordable loan products without overly burdensome down payment requirements,” he said.

And Mel Watt, the newly appointed Director of FHFA that oversees Fannie Mae and Freddie Mac just announced he would be easing credit standards for the largest guarantors of residential mortgages.

But it is a two-edged sword, according to pundits. Watt said that Fannie and Freddie are working to develop “sensible and responsible” guidelines that will allow them to buy mortgages with down payments as low as 3 percent, instead of the 5 percent minimum that both institutions currently require. But lenders will not have to retain earnings to cover any losses, which means they could again begin to offer subprime mortgages (but that are not sold to Fannie or Freddie).

This change would apply to a “targeted segment of creditworthy borrowers” and take into account “compensating factors,” Watt said. (Housing experts speculate that maybe the lower down payments would only be offered to first-time buyers.) More details to come in the weeks ahead, Watt added.

But these provisions should boost sales to first time homebuyers, in particular who might not be able to afford larger down payments.

Graph:Calculated Risk

Sales of newly built, single-family homes inched up 0.2 percent in September to a seasonally adjusted annual rate of 467,000 units, the highest level in six years. Sales numbers for August were revised down from 504,000 to 466,000.

“Three consecutive months of sales upticks demonstrate steady growth in the housing market,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB). “Consistent job creation and low mortgage interest rates are spurring the release of pent-up consumer demand.”

So new-home sales have to improve, as well, to enlarge the housing inventory. Right now, most of housing construction is now multi-family dwellings to absorb the increasing demand for rental housing.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Will Housing Starts Pick Up?

The Mortgage Corner

“An uptick in single-family permits was probably the most important feature of a May residential construction report that was otherwise somewhat softer than our forecast,” says the research firm, Wrightson ICAP. Total housing starts fell 6 percent to a level of 1.001 million, reversing about half of a 13 percent April jump. Construction fell in three out of the four regions, but were up in the South.

The reason was overall permits fell 6 percent, or about twice as much as Wrightson had expected, reflecting a nearly 20 percent decline in the multi-family component. That left those permits at a four-month low, but “we are not too concerned with the decline, which looks to be a correction for a very strong April showing in this always-volatile sector,” said Wrightson.

Graph: Calculated Risk

The standout number in today’s report was the 4 percent rise in single-family permits to a six-month high of 619,000. After hitting a recovery high of 645,000 in November, single-family permits had been stuck in a tight range of 593K to 600K over the last four months. The breakout in May, along with the jump in the NAHB Builder Optimism index to 49 in June, seems to suggest that single-family activity could be about emerge from its recent doldrums over the next few months.

Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes rose four points in to reach a level of 49 in the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released yesterday. It remains one point shy of the threshold for what is considered good building conditions.

“Consumers are still hesitant, and are waiting for clear signals of full-fledged economic recovery before making a home purchase,” said NAHB Chief Economist David Crowe. “Builders are reacting accordingly, and are moving cautiously in adding inventory.”

One reason consumers are cautious is because interest rates have risen slightly, though the 30-year conforming fixed rate is still low, at 4 percent with 0 origination points in California. The Federal Reserve added more fuel to the controversy after yesterday’s FOMC meeting and Fed Chairman Janet Yellen’s press conference, when Yellen said short term rates could now rise sooner in 2015.

But the Fed also revised its growth predictions downwards, which would have the opposite effect—that of holding down interest rates longer! In fact, just two days after the International Monetary Fund revised its 2014 growth estimates for the U.S. economy from 2.8 percent to 2 percent, FOMC members revised down their estimates from a range of 2.8 to 3 percent in March to 2.1 percent to 2.3 percent following this most recent FOMC meeting. But the Fed maintained its 3 percent growth estimate for 2015.

So I predict such a low growth rate will not push up interest rates, at all. In fact, mortgage rates in particular could even drift lower by the end of this year, unless the housing market—construction in particular—picks up.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New-Home Sales Answer to RE Recovery?

The Mortgage Corner

Privately-owned housing starts in March were at a seasonally adjusted annual rate of 946,000. This is 2.8 percent above the revised February estimate of 920,000, but is 5.9 percent below the March 2013 rate of 1,005,000. Single-family housing starts in March were at a rate of 635,000; this is 6.0 percent above the revised February figure of 599,000.

We can see from the initial 2008 chart date that multifamily construction (red line) is back to pre-recession levels, but single-family starts are at 75 percent of pre-recession levels (blue line).  This mirrors the surging demand for more rental housing, which still boosts overall growth.

“We see improving signs of new-home construction as we move into the spring buying season,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB).  “The strongest recovery is in the Northeast and Midwest, where builders were hampered by severe winter weather earlier in the year.”

“Today’s report is in line with our forecast of a gradual strengthening in the housing sector in 2014,” said NAHB Chief Economist David Crowe. “However, several uncertainties including tight credit conditions for home buyers and erratic job growth are making builders cautious about getting ahead of demand.”

Single-family construction is the better barometer for home sales, since it also boosts, building design, insurance and mortgage activity, and so economic growth. And it is picking up in the spring thaw. Multifamily starts fell 6.1 percent to 292,000 units.

Graph: Calculated Risk

Lower mortgage rates are helping, as refinance mortgage applications jumped 7 percent, and purchase applications are up 1 percent in the latest MBA applications survey. It’s because the 30-yr conforming fixed rate has again dipped to as low as 3.875 percent for 1 origination point in California.

Graph: Calculated Risk

But applications are still at post-recession lows. They have returned to 1997-98 levels, and have dropped from early 2013 levels when fixed mortgage interest rates were in the 3 percent range. It seems that QE3 did bring down interest rates sufficiently to help the housing recovery, but now applications are stuck at the low level as QE3 is being ‘tapered’. The Fed is predicted to end QE3 purchases by the end of 2014.

That leaves uncertainty about the direction interest rates into the fall and winter.  They have recently plunged because of uncertainty over the confrontation in the Ukraine, and how much sanctions might damage economic activity.  The US is saying it can’t hurt domestic growth, and the IMF has predicted a pickup in worldwide growth, but what if Putin decides to invade the Ukraine?

Then all bets are off.  But at the very least it would keep interest rates at the current low level, and so help the housing market, in particular.  It also means middle income consumers still lack the means to boost their housing purchases when rates are much higher.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen