The housing sector has been on the mend for quite some time. Over the past couple of years, we have seen drastic improvement in the housing industry, which was the root cause to the financial crisis back in 2007-2008.
Given the improvement in housing, many economists and investors have been able to see economic improvement because housing stopped putting a drag on growth and this alone was a net positive to GDP.
Last week, we received some housing data which has made economic predictions for the near future a little bit more difficult.
Ever since the idea of tapering was made public by Fed Chairman Ben Bernanke in late May, we have seen the average rate on a 30-year mortgage (via Bankrates National Average) move from 3.75% to 4.55%.
The current mortgage rate of 4.55% is still a low mortgage rate, relative to the average 30-year rate going back to 1998 of 5.68%. But the rapid spike in the cost of borrowing from the very low levels has likely stunted desires to borrow in the immediate future.
Over time, the current higher rates should become more normal for us, but the initial “sticker shock” may hurt housing in the near term, thus also impacting economic growth in the second half.
The impact of the mortgage rate move can be seen in last week’s housing data. Existing home sales data is calculated by monitoring home transactions which are reported when “the sales contract is closed.”
Thus the sales contract was probably signed 30-60 days prior. This means that existing home sales act more as a lagging indicator given the fact that mortgages were locked in prior to the transaction being recorded in the monthly data point.
The more concerning data point was new home sales. New home sales are determined based on “the signing of a sales contract or acceptance of a deposit.” Thus, this shows the number of buyers that are out there, likely before obtaining a mortgage. And so this would be impacted by people’s lack of borrowing desire and it would be evident in this reading before the existing home sales number.
So, what’s the concern? New home sales fell 13.4% in July and this seemingly has been caused by the recent spike in mortgage rates. And depending on how long the mortgage rate spike shock goes on, it could ultimately influence GDP estimates along with actual GDP growth in the near future. This would add another wrinkle to the Fed’s meeting in September and their decision on tapering.
The recent softening in the new home sales data likely won’t change Fed officials’ minds in regards to the act of tapering. But the softening, along with some less than enthusiastic employment numbers, might make the amount of the Fed’s tapering less than people currently believe. This would then likely extend the easing further into next year than is currently believed.
(All data used within The Capital Course was provided by Ned Davis Research)
