The Mortgage Corner
There’s an exception to the current low inflation prognostications echoed in my column by the San Francisco Fed Prez John Williams. It’s in housing, which is struggling to meet the surging demand for both new homes and apartments that our newest millennial generation and immigrants need. The result is housing prices are rising faster than inflation, some 5 to 6 percent.
But if Janet Yellen and her Fed Governors give in to the cry by inflation hawks for higher interest rates just because Q3 and Q4 growth may be slightly higher than the horrid current GDP growth (how about 1.2 percent?), the housing rally (if you can call it that) would be nipped in the bud. It’s only because of the record low mortgage rates that housing is becoming more affordable for those that can afford to buy—which is the diminished American middle class. We will know more when both new and existing-home sales come out this week.
Millennials are the new baby boomers (as well as their offspring) in being the largest population group in history. And they are coming of age, all 80 million of them, of which the oldest now are 36 years of age and forming households.
This increased demand for housing is reflected in new home construction and higher builder optimism, reflected in the Wells Fargo Housing Market Index that measures home builders sentiment, and has been positive since January 2014.
July housing starts rose a strong 2.1 percent to a 1.211 million annualized rate which comes on top of June’s 5.6 percent surge. Starts for single-family homes, the most important category in terms of economic growth, rose a very respectable 0.5 percent in July but were dwarfed by a 5.0 percent surge for multi-family homes. These results point to ongoing strength for construction, as well.
Other signs point to faster growth, such as industrial production, which is finally expanding after contracting for more than one year. July production jumped 0.7 percent to give a big one half point lift to the capacity utilization rate which is at 75.9 percent, according to the Federal Reserve. And the Chicago Fed’s National Economic Activity Index that attempts to measure overall US growth rose to a 12-month high this week.
Manufacturing output rose 0.5 percent in the month which follows a downward revised but still very respectable 0.3 percent gain in June. Vehicle production was exceptionally strong in June and was also very solid in July though other manufacturing industries were also strong contributors to the latest month’s gain.
Hi-tech was also strong in the month and a look at market groups shows 0.6 percent monthly gains for both consumer goods and business goods, the latter a plus given the persistent weakness in business investment.
The pundits are saying that Fed Governor Yellen will hint at a boost in the Fed’s short term rates from 0.5 percent, at their annual Jackson Hole summit, but that would be a mistake. There is no really affordable housing being built at present, which means rents and rental housing will have to carry the burden of new household formation.
And the result is that rents are now rising at record rates throughout the country. In fact, RealtyTrac, (www.realtytrac.com) “the nation’s leading source for comprehensive housing data,” released its 2016 Rental Affordability Analysis in January, which shows that buying is still more affordable than renting in 58 percent of U.S. housing markets despite home price appreciation outpacing rent growth in 55 percent of markets. The report also shows that the rise in rents is outpacing weekly wage growth in 57 percent of markets, per Realtytrac.
Harlan Green © 2016
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