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.

By Charley Blaine Aug 23, 2013 4:46PM
Construction of a new home in Daybreak, Utah. © George Frey/Bloomberg via Getty ImagesThere's a consensus view around the country that the national recovery depends in large degree on a housing recovery.

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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154Comments
Aug 23, 2013 8:43PM
Aug 23, 2013 5:46PM
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The biggest problem is the consumer. They have changed from conspicuous consumption to survivalist. This is happening in all the industrial countries.
Aug 23, 2013 6:44PM
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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.

Aug 23, 2013 10:57PM
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If 30 year mortgage goes away, very few homes will be sold.  Unless the price of homes is cut in half.
Aug 24, 2013 3:03AM
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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 ~

 

Aug 23, 2013 6:54PM
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15 year mortgages will result in empty houses because young families will not be able to afford the high monthly payments plus the insurance plus the high utilities bills.  Somebody is not looking at the whole picture to make housing affordable. Homeless families will be everywhere.  Okay, South Carolina got any comments on that?
Aug 23, 2013 6:40PM
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People comparison shop and look for bargains.

Rates are up--anyone qualified to buy on terms has done so--and the cash buyers are looking for something they can steal.

Aug 24, 2013 11:55AM
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Get used to this AMERICA,this is the new norm.With QUALITY job creation near zero or negative,and the ACA being implemented  debasing  current jobs is in full swing., and will take housing with it.
Aug 23, 2013 5:27PM
Aug 23, 2013 6:46PM
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the housing prices are way to high for  workers income.The jobs created many been low income  and been not enough .Interest rate still extremely low to have any effect in  house sales.also jobs creation is low.most of the  money is invested in pumping up speculative stocks and not enough in research or making better houses  to withstand tornadoes or hurricanes. improving house quality in states with hurricanes and tornadoes will create jobs
Aug 24, 2013 10:29AM
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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.           

Aug 23, 2013 8:53PM
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Also I think high prices on homes are inflated as well as on apartments, unrealistic!!!  Everywhere I read unaffordable homes and unaffordable apartments that only high-wage people can afford! Crazy!!
Aug 24, 2013 9:26AM
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Be careful of headwinds when considering Obamaville's neighborhoods are full of houses made of cards

Aug 24, 2013 1:13PM
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was that Biden's summer of recovery???  Certainly wasn't a housing recovery!
Aug 24, 2013 2:12AM
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Guess housing and retail Wal and Tar and Macy tell the real economic story.
Aug 23, 2013 7:45PM
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It seems that economists look at the past when deciding what's best for the future. This is a problem in an era of diminishing resources, global climate change, and expanding populations. Rather than trying to increase consumption we ought to be looking for ways to collectively downsize and reduce consumption footprints. This means reducing GDP...especially on a per capita basis. Achieving this doesn't have to mean deprivation. We can reduce our consumption, work less, have more free time, and perhaps even enjoy it more. Those who profit most from our consumption may not be happy, but we shouldn't be concerned with that. A few less billionaires in this world be a good thing. 
Aug 23, 2013 5:48PM
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8 years ago, you could buy a brand new house in a brand new subdivision and pick out all your own finishes for about the same or less than you could buy a "used" house.   That's starting to change, thanks to a glut of 5-10 year old homes on the market, and it may explain the decline in new home sales.

Aug 23, 2013 8:20PM
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The Housing Market... what will stand out shortly is that everyone who invested in their homestead last decade and got screwed in the Housing Crisis, is stuck there until the economy returns. We let people walk away from a major credit obligation, forgave part of it and allowed them to buy uptown. That has to be fixed. From the moronic Mark to Market credit facilitation nightmare authored by Goldman Sachs to the offering of mortgage rates below service and overhead costs to the Fed's buyback program... it all requires fixing. Be advised- every mortgage written below 4% will become a liability to service in a few years because it won't generate enough interest to cover it's own servicing cost. Why Gen X & Y folks will smugly say-- that's your problem not mine, it absolutely is. The cost credit without manipulation will skyrocket. If it goes too high, it destroys itself. The Fed's massive ticking time bomb obligation will cost each of us- plenty. Add these up and the net pay could drop to 50% or less of the gross. Where does this leave housing? If you can't afford to work and can't afford to live, you don't buy a house. As values fall (undesirable surplus)... we go out of business. It's NOT taper time... it's abrupt ending of QE time and way past time to reform Wall St and the financial sector. It isn't our government... it never should be.  
Aug 24, 2013 2:41PM
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A 15 year mortgage is more natural and sustainable then a 30 year mortgage... The 30 year mortgage only propped housing prices and indebted people there whole lives.... A 15 year mortgage will force housing prices down to realistic levels and keep people from being in debt their whole life... Once again the government getting involved via Freddie/Fannie loans creates more problems then it actually fixes... Getting a mortgage should be difficult and the requirements stringent, not everybody should own a home, hence the housing bubble in 2008 that was fueled by the government and banks giving out mortgages to everybody who walked thru the door ... The government is the flaw and failure of all things economic, if you trace back and do your research 9 out of 10 times the government was involved when **** hit the fan...
Aug 24, 2013 2:57PM
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My research shows me that in last year of all the homes that was bought was in CASH! The banks only contribute half of the loans, because everyone knows it's alot harder to get a loan today then before the 2008 crash. And the kicker is that the people who bought the homes in cash are the ones that really knows what's going on with the our market by buying up the short sale and repro homes at half the price is win win situation for the buyer. Why keep cash in your bank when there's a great chance that "BANK DAY" could happen very soon rather then later. It's better to own assets like a home, gold and silver then carnival money. The thing is I just found out is that the banking system is very easy to have a Hacker break in though a cyber- attack in their banking system, making everyone lose their money,401k and bonds and the banks are not be responsible for the cyber-attack, so the FCC $200,000 insurance won't cover your lost.Mark my words,their will be a very great chance this will happen very soon. And the 2nd kicker is that they probably will blame Syria,Iran, China or some middle east group so the world bank IMF banks could get in with Syria and Iran to start buying the petrol-dollar by us going in a major war against them, because the American people are fed up with wars and they try to hit us in our pockets and our lively hood to get the American people mad enough to back the military attack.
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