Housing Outlook Still Positive

Includes: ITB, IYR, KME, REZ, XHB
by: Calafia Beach Pundit
The NAHB Home Builders' Market Index jumped in July to 57, much higher than the 51 that was expected. A majority of homebuilders now see conditions as "good."

To put this in perspective, the chart above compares the homebuilders' index to the level of housing starts (HT: Calculated Risk). The recent strength in the index suggests that we could see some very strong gains in housing starts in coming months.

As a counterpart to the strength in starts and home builder sentiment, many worry that the recent jump in mortgage rates will shut down the recovery in housing. I note that housing starts were doing just fine in 2000, when mortgage rates were 8% -- almost twice as high as they are today, and the decline in mortgage rates since then did not prevent a housing market collapse. This is a reminder that higher interest rates don't necessarily cause housing weakness, just as lower interest rates don't necessarily result in a stronger housing market. The causality usually runs the other way: A strong housing market is more likely to result in higher interest rates, especially at a time like now, when mortgage interest rates are still very low by historical standards.