By Raymond Michaels
Since 2011 the US housing market has rebounded and the major home builders have increased their market capitalization by one hundred percent. Today the housing sector continues to gain potency despite the worry of rising mortgage rates.
During the third quarter of 2013 home builders reported excellent profits further solidifying the recovery in the housing sector. For example, major U.S. home building companies such as Lennar Corporation (NYSE:LEN) reported that their third-quarter earnings increased by 39 percent and KB Home (NYSE:KBH) reported a profit increase seven times higher than the same quarter the previous year.
Figure 1: New Family Houses Sold In The United States
Helped by declining unemployment, a low mortgage rate and a lack of homes on sale, the housing market has been on a steady recovery since late 2011. However, sales declined in July by 14.1 percent as the annual rate of new home sales went down to 390,000 in July from the five year high of 497,000 in June. Yet, according to U.S. Department of Commerce Census Bureau, seasonally adjusted year-over-year rate of new home sales in the US increased 7.9 percent in August to 421,000 (Figure 1).
While third-quarter of 2013 is ending in a bullish tone, worries loom over rising mortgage rates. The momentous growth in new home sales in last few months dropped significantly in July because average fixed mortgage rates in the United States went up more than 50 percent since May 2013. If a homebuyer closed in May, their fixed mortgage rate would have been 3.43 percent compared to 4.64 percent in July (Figure 2).
Various realtors’ groups are already cautioning that August 2013 home sales rates could have been a temporary peak as the gain included closings. Many potential buyers hurried to close the sale in order to lock in historically low fixed mortgage rates in June and July, expecting that the rates will rise further. Realtors have already observed sluggish “buyer traffic” in August as a direct consequence of rising mortgage rates.
One key aspect of home sales in recent months has been the presence of institutional buyers who buy homes in bulk for rental income. CEO of one such company, Carrington Holding, Mr. Bruce Ross has noted that he doesn’t see the opportunity to invest as mortgage rates have risen beyond the possibility of having a positive return.
Many economists are confident that the housing recovery will continue beyond the recent hike in the fixed mortgage rate. According to Mortgage Bankers Association new applications for mortgages have increased 7 percent compared to last year, however refinancing applications declined by more than 70 percent since May 2013. Banks are trying to cope with the situation by laying off workers from their mortgage segments. Citigroup alone axed more than a thousand jobs in September and at other national banks, such as Wells Fargo and Bank of America, employees have faced similar layoffs in recent months.
The housing market has recovered significantly since the gloomy sub-prime crisis period and subsequent recession. The fact is this recovery has been significantly assisted by the Federal Government and its monetary policy. There are macroeconomic factors to consider such as the long term policy of the Federal Reserve’s bond buying operation that will have considerable bearing on the fate of the housing sector.
US Mortgage rates have been low for so long as a consequence of overall monetary policy by the Federal Reserve, to keep all lending rates low, as well as pushing cash into the economy though buying bonds on the open market. Mortgage rates came down almost half a percent after the Federal Open Market Committee, the Fed’s policy-setting body decided not to “taper” and keep their $85 billion a month bond buying operation until the unemployment rate reaches 7 percent. According to U.S. Bureau of Labor Statistics, the current unemployment rate in the US is 7.3 percent and the desired 7 percent rate should be reached by mid-2014. This gives us a broader perspective on how far the housing sector recovery can go with Federal assistance. After mid-2014, once unemployment hits the desired number and the Fed stops buying bonds, mortgage rates will climb further and home sales will be more dependent on the overall bullishness in the economy.
The coming months will be the real acid test of overall recovery in the housing market as back-orders from the low rate period are almost cleared. Going forward, consumer confidence in the US economy will drive home sales. A New York based research group, The Conference Board measures overall consumer confidence in the United States. They reported on September 24, 2013 that their consumer confidence declined 2.56 percent in September and currently their index stands at 79.7 compared to 81.8 in August. While this is not significant, the decline represents a key point that buyers are more cautious regarding overall macroeconomic factors and job security.
After the razor-sharp rise in mortgage rates during end of June 2013, Trulia conducted a survey on a random sample of 2,000 potential home buyers. 41 percent responded that their biggest worry regarding home buying in 2013 is the rising mortgage rate. 13 percent responded that a 4% rate is already too high for them to consider buying a home now, while 42 percent said they would be put off buying a home if the mortgage rate goes above 6 percent, only 1.7 percent from the current average rate of 30-year fixed mortgage.
The catch-22 with the housing sector recovery is if the economy is bullish then the Federal Reserve will put a brake on, and if it doesn’t then it means the economic recovery is not gaining momentum. If consumer confidence stalls and mortgage rates reach the tipping point where 55 percent of private home buyers are discouraged from purchasing new homes, the coming months will see a significant decline in home sales. But it doesn’t guarantee that mortgage rates will stay at current levels as the Federal Reserve may start to tighten up their monetary policy once unemployment reaches their desired level.