The Mortgage Corner
We see housing in 2016 continuing to grow the economy. This is mainly because new-home construction should surpass 1 million units again this year, and it is new-home construction (and sales), rather than existing-home sales that adds to economic growth.
For instance, we see in the December unemployment report that 45,000 new construction jobs were created plus 73,000 jobs in Professional and Business Services, which include attorneys, accountants, insurance agents, architects and designers that work in the real estate industry.
Much will depend on interest rates this year, of course, but the conforming 30-year fixed rate has barely budged from its record low of 3.50 percent for a one point origination fee. A 3.375 percent fixed rate is even available in California if a borrower wants to buy down the rate further.
The best indicator of future sales is the NAR’s Pending Sales Index, which is based on signed contracts, and consistently in 2015 predicted sales in the range of 5 million to 5.5 million, similar to the level in the early 2000s.
One reason we believe housing has more room to grow is that new-home construction hasn’t fully recovered from the Great Recession, and is the reason for lower sales of new homes. Sales have generally picked up through the year, but are running at half the rate of 2000 and 2001, when nearly 1 million newly built homes were sold. New-home sales rose in November to an annual rate of 490,000, which is far below the peak of around 1.2 million sales in 2005.
More new-home sales will depend on increased household formation, which economists are predicting will return to 1.2 million new households per year. Why? The Millennial generation is beginning to buy as they marry and begin to raise children.
Some 1,071,000 construction jobs have been added since 2011, according to Calculated Risk. And delinquency rates have returned to pre-recession levels—in fact are the lowest in history, according to Black Knight’s Mortgage Monitor Report, reports Calculated Risk’s Bill McBride. This is perhaps the most important statistic for the housing recovery, since it means more borrowers are available to buy homes. Black Knight now calculates that approximately 5.2 million borrowers could likely both qualify for and benefit from refinancing at today’s interest rates.
But if mortgage rates rise by even 50 basis points (i.e., 0.5 percent), some 2.1 million borrowers will no longer be eligible for refinancing, or buying another home, says Black Knight.
So does the Fed really want to slow down or even kill the housing market, if it continues to raise their interest rates? That is the real question. This might not affect mortgage rates all that much, however, as mortgage rates depend on longer term interest rates and the bond market, which follows inflation.
But we still have almost no inflation. Higher food prices are balanced by lower gas and commodity prices in general, and which will continue to fall as the oil glut continues this year. We believe that interest rates will therefore remain low throughout 2016.
Why? There is very little growth in the rest of the world, and developing countries like Russia and Brazil are already in recessions, while China’s economy stagnates. That means foreign investors will still flock to the one safe haven in times of uncertainty—U.S. Treasury Bonds—thus keeping our interest rates low.
Harlan Green © 2016
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