Housing: Waiting For The Pinch From Higher Interest Rates

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Includes: DRN, ICF, ITB, IYR, RQI, RWR, SCHH, SRS, URE, VNQ, XHB
by: Hale Stewart

By New Deal democrat

With new home sales reported this morning, we have a good picture of the housing market through January. To refresh on a couple of points, the general order in which the housing market trends is:

1. interest rates turn

2. next, sales turn

3. after that, prices turn

4. finally, inventory turns.

Over the last 8 months we have been whipsawed, first by nearly all-time lows in mortgage rates after the Brexit vote at the end of June, followed by a roughly 1% increase within days after the US presidential election that has persisted ever since. So I have been watching for, first, an increase in housing sales, followed by a pivot to at least a sideways if not slightly down market.

Here is the YoY change in mortgage interest rates (inverted, blue) for the last 35 years compared with the YoY% change in housing permits (red):

Almost always, permits follow rates. The big exception was during the last couple of years of the housing bubble, followed by the first couple of years of the housing bust, where sales continued higher for several years in the face of higher rates, and then had a huge decline that persisted long after rates declined.

Here is a close-up of the last 5 years:

After the taper tantrum of 2013, higher rates caused growth in sales of houses to taper off - but not turn down, due to the demographic surge in Millennials, similar to the demographic surge in Boomers half a century before.

New home sales, while very volatile, tend to lead even permits. Below they are shown in blue, updated as of this morning. In red are single family housing permits, which are the least volatile of the sales measures:

These two series are seriously diverging, with new home sales not having made a new high in 6 months, while the trend in single family permits has clearly been of improvement.

When we compare YoY permits (red) with the YoY change in prices as measured by the FHFA (green), we see that prices have been nearly flat recently:

Meanwhile when we compare prices with the YoY change in inventory (purple), we see that inventory is still increasing:

It is nearly certain that we have seen a generational low in interest rates as of last July. It is also quite possible we have already seen the high in new home sales for this business cycle. I anticipate the permits will turn sideways if not down in the next several months.

Meanwhile prices should rise some more as the increased sales over the last 6 months feed into seller confidence, while inventory growth should subside.

The housing market remains at the beck and call of the next decisive move in interest rates.

New Deal democrat, XE.com