Are headwinds building against housing market?
It's not just rising interest rates that may cause problems for home buyers. It's the possible demise of the 30-year mortgage, too.
If that's true, the recovery is facing some headwinds. These include the current economy and rising interest rates, and one that's starting to loom is the future of the 30-year mortgage.
The short-term headwind is that rising interest rates appear to be depressing new-home sales.
Sales in July fell 13.4% from June to an annualized 394,000 units, the Commerce Department said on Friday. And June's sales rate was revised down from an original estimate of 497,000.
Most of the declines occurred in the West -- everything west of Texas and Oklahoma -- and the South -- which the government defines as everything from Delaware, Virginia and Kentucky to Texas and Oklahoma. The good news from the report is that, despite the decline, July sales were up 6.1% from a year ago, and new-home sales so far in 2013 are up 21.8% from 2012.
The rate on a 30-year fixed-rate mortgage moved up from its April and May levels to 4.4% for most of July and is now around 4.6%. The rate increase would boost the principal-and-interest payment on a $200,000 loan from $887 to $1,025, and that might be enough to make a prospective buyer at least think twice. And remember, the typical buyer of a new home is a move-up buyer.
The new-home sales report is actually a report on contracts signed, not actual sales. So it's also possible that many buyers had already made their purchases in the spring, when the housing market was nearing peak activity.
But that's salve to a wound, not much else. Housing stocks fell on the report, although stocks overall have been higher for a second day in row.
Ryland Group (RYL) fell $1.99 to $34.85. D.R. Horton (DHI) was off 55 cents to $18.73, and Toll Bros. (TOL), which pointedly goes after the luxury buyer, was down $1.28 to $31.19.
The iShares Dow Jones U.S. Home Construction (ITB) exchange-traded fund, which tracks building stocks, was off 55 cents to $21.07 on Friday. It's down about 19% since peaking in early May -- when mortgage rates hit 3.4%, their lowest level of the year.
The Dow Jones industrials ($INDU), meanwhile, closed up 47 points to 15,011, regaining 15,000 for the first time since Wednesday. The Standard & Poor's 500 Index ($INX) was up 7 points to 1,664, and the Nasdaq Composite Index ($COMPX) gained 19 points to 3,658.
All that said, the report was a downer because housing, for better or worse, is a powerful fuel for the broader economy.
Moody's Analytics estimates that every new-home purchase generates more than four jobs in construction, manufacturing, transportation and financial services. So, a slowdown in housing may have a larger effect on the economy than one might expect.
Moody's Analytics would really like to see U.S. housing starts hit about 1.7 million units a year, which chief economist Mark Zandi thinks is a normal level. Starts that big would generate perhaps as many as 3 million jobs. The starts rate in July was 896,000 units, up 5.9% from June, but single-family starts fell 2.2%.
The future of the 30-year mortgage is potentially a big deal. The mortgage exists because the government has championed the loan since the 1930s. That's when it first created Fannie Mae (FNMA), which buys loans from lenders so they have more cash to lend.
There's talk about liquidating Fannie Mae and its sister company Freddie Mac (FMCC). Both were basically done in by investments in sub-prime mortgages and were taken over by the government in 2008 when the real estate market collapsed.
If Fannie and Freddie are liquidated, there's talk that the availability of 30-year mortgages would decline precipitously. Instead of a 30-year fixed-rate loan, you'd get a 15-year loan.
This is an idea that needs some public vetting. According to Bankrate.com, a 30-year loan would cost 4.6% a year. If you were buying a $250,000 house and making a 20% down payment, your principal and interest payment on the resulting $200,000 loan would be $1,026. A 15-year loan at 3.6% would produce a monthly payment of $1,440, an increase of $414 a month.
Yes, a 15-year mortgage will amortize quickly, but home buyers think first about the monthly payment. Numbers like that will definitely make people think about buying a house.
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I want America back to the way it was... free market forces, at least as free as they can be. This socialist mumbo jumbo is just blowing bubbles. Interesting how the government induced bubbles have such a short life span today. The phony values on the stock market don't have much longer before they pop too.
QE never created anything. It just transfered wealth away from savers to the economy. And this is not sustainable. Fix the whole economy for real this time. It may be painful, but will be sustainable.
But the 53% don't care about the future of America -- they only care about their own wallet and today. Anyone that cares more about today than their own kids' futures shouldn't be allowed to vote. Socialist Liberal Narcissistic Sociopaths are what they are. And I am allowed a rant every so often.
Small Gains & Future Pains,
In the past four years the nation's slow climb back out of the abyss of the global economic calamity has been anything but stellar, and the only reason there's been any improvement at all is due to the printing of more money, quantitative easing and the Fed's continued purchase of discounted long term treasury's, averaging about $85 Billion each month. The government and the banks rebuilt a false bottom to what was a bottomless pit. While some sectors like housing have shown some growth, the nation's economy is stymied by a stubborn 7.4 % unemployment rate which is closer to 13% or 14% if the long-term, (and off the roles), unemployed and the underemployed are factored in.
The recent economy's growth averages of 1.6 to 2.1 % can not hope to absorb the 1.8 million new people who enter the job market each year. Ominously rising energy, health care and food prices have continued to prevent average Americans from maintaining or increasing their amount of discretionary spending on other tangible goods and services, hence the retail slowdown.
In Asia, China's economy is about to hit the bubble, with tighter money and rising internal inflationary factors projected to cut it's annual rate of growth by 35% over the next two years. Meanwhile, India has seen a 17% decline in the Rupee since April, and it's balance of payments with the West are in jeopardy, which would be proportionately detrimental to the still struggling EU.
Perhaps I've read the tea leaves wrong, but with a major correction of perhaps 10% to 12% on Wall Street all but inevitable by year's end, the resultant losses may be the straw that breaks the camel's back, putting the country on the cusp of another serious recession in the coming year. Unfortunately it is going to continue to be a very bumpy ride. Peace to all ~
Rates are up--anyone qualified to buy on terms has done so--and the cash buyers are looking for something they can steal.
And there are lots of headwinds out there - An anemic economic recovery that's produced few decent paying jobs, the uncertainty of Obamacare, rising interest rates and the looming end of many governement mortgage assistance programs.
With so many of our well-paying manufacturing jobs exported by the free trade zealots, house construction work was one of the few bright spots for skilled trades people to earn a reasonable living. And even there lax immigration enforcement meant a significant portion of those jobs were filled by workers not legally in the country.
Sustained improvement in the housing industry will only happen when we see a broad-based economic recovery that creates more than a boatload of McJobs. No offense to Wal-Mart or McDonalds employees but housing booms aren't triggered new minimum wage jobs - they're fueled by young families where the primary bread-winners hold down well-paying blue or white collar jobs.
The kind of jobs Obamas frequent 'pivots' to the economy hasn't fostered or created.
Be careful of headwinds when considering Obamaville's neighborhoods are full of houses made of cards
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