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Wednesday's Data -- Everyone's Forgotten about Housing

Mortgage Apps

 The Mortgage Bankers Association reported that its applications index rose 5.0% last week, marking the third-straight increase.  However, a 7.7% rise in apps to refinance a mortgage accounted for the overall index’s gain as apps to purchase fell 1.9% -- the third week of decline and down five of the past six weeks.

 The average contract interest rate on the 30-year fixed mortgage dipped 10 basis points to 4.77%.   Here’s a 20-year view of the rate:


 Applications to purchase a home are down 10% over the past six weeks from an already depressed level – currently at a 13.5-year low.


 The mindset within the equity markets has become extremely complacent as surely everyone seems to have forgotten about housing – undoubtedly one of the major two or three risks as one looks out over the next 12-18 months.  Purchase applications are just one of the several data points showing that housing market demand remains extremely weak even as supply is bloated.  And the supply glut is beyond any postwar historical precedent as the shadow inventory of existing homes more than doubles the official gauge and a plethora of foreclosure delays and moratoria will cause the number of distressed properties to flood the market over the next two quarters. 

 Housing Starts

 The Commerce Department reported that housing starts came in at the lowest level since hitting the all-time low in April 2009, falling 4.3% m/o/m to 529,000 at a seasonally-adjusted annual rate (SAAR) – expected to come in at 550,000.  And without the 18% jump in multi-family unit starts, the overall figure would have been closer to 510K. 

Building permits did bounce 16.7% (much greater than the 1.8% increase that was expected) to 635,000 units SAAR.  While the 50-year average on permits is 1.4 million, the boost means housing starts will bounce over the next couple of reporting month. 

 Bottom line is housing starts remain all but floored, dropping 22% since April 2010 when the new-home construction market got all excited about tax credit-led buying and decided to ramp up home building.  That proved to be a poor decision as the industry now has to deal with the payback; home supply has to deal with the payback that follows the silly game of government-directed capital allocation – or put more appropriately, misallocation. 

But none of this really matters all that much for near-term economic activity purposes, housing has been so crushed that it accounts for a mere 2.3% of GDP at this point.  The main thing to take from this data is this is what happens when government social engineering (creating as many homeowners as possible without regard for an ability to pay) combines with misguided monetary policy (there is no doubt the Greenspan/Bernanke decision to hold the real fed funds rate negative 2002-2005 created the fuel to rocket that social engineering policy out of control).   

The reality is home building is going to remain floored for the next 18-24 months due to the current, and coming, supply of distressed existing-home properties.  And if the industry decides to increase the level of construction, or the government comes through with another short-term “fix,” then ultimate repair of the home market will only be further delayed.  It just takes time as home values must fall further to find the market-clearing price that allows for the absorption of supply.