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Housing Rebound in Full Swing

Mortgage Rates Inch Upwards

Written by Brian Hicks
Posted June 19, 2013

It looks like we can safely indicate a steady recovery for the housing market in the U.S., as May saw housing starts climb up 6.8 percent to an effective annualized rate of 914,000 from April’s 856,000.

house construction sidebarBloomberg reports that May also saw an increase in the pace of builders working on new houses, and permit approvals for new single-family homes were at their highest levels in five years.

Approval of building permits were actually a bit faster than new ground-breaking, which should set in motion a domino effect with growth increasing against slowdowns in the manufacturing sector and the chilling effect of the sequester. National inflation continues to stay below the Federal Reserve’s target of 2 percent, meaning continued flexibility when it comes to devising ways to combat unemployment. The Fed's meeting to debate a draw-down of its ongoing asset-buying program ends this afternoon.

Meanwhile, mortgage rates continue to rise, which is a good indicator of the sustained demand for loans. However, that increase in rates could at some point have a slowing effect on new home-buyers and builders.

Fortunately, that has not yet happened. June, if anything, saw builder confidence at its highest since March 2006, according to the National Association of Home Builders/Wells Fargo Index. That index hit 52, which crosses the key psychological barrier of 50. In short, the majority—if only a slight majority—now believe that sales conditions are better rather than worse.

The change is striking, actually. Last year, just 15 percent of respondents believed conditions favored sales, and now that figure is up to 41 percent.

Bloomberg reports:

“A lot of us are expecting that we need 1.6 million to 1.9 million housing starts to keep up with population growth,” Brad G. O’Connor, chief accounting officer at Red Bank, New Jersey-based builder Hovnanian Enterprises Inc., said in a June 13 presentation. “Housing creation shows that we should still have a fair amount of pent-up demand and an ongoing recovery to the housing market, that we’re just in the beginning of that recovery.”

Through May, single-family house construction was up 0.3 percent, meaning an increase from April’s 597,000 to 599,000. Multi-family building construction also saw an increase—21.6 percent to an annualized level of 315,000.

Indeed, as CNN reports, June tends to be a bit of a slow month for housing numbers. This year, however, activity is picking up across the board. Taken together with the slowdown in foreclosures, continued rise in housing prices, and the rapid increase for new and previously-owned homes, it’s clear that the housing recovery is well and truly underway.

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An interesting and new issue is that as of now, there are just 4.1 months’ worth of new homes available for sale on the market. That’s barely above January’s record of a nine-year low. In short, there aren’t enough new homes on the market to meet demand.

In tandem with this surprising point, CNN also notes that builders are apparently having trouble finding enough workers.

Nonetheless, it looks like more and more people are taking advantage of the current situation to buy homes before mortgage rates go even higher. Early May figures indicate that the average rate on a 30-year fixed loan hovered near 4 percent—nearly a 14-month high—from its previous level at 3.35 percent, which was a four-month low.

Clearly, the low rates aren’t going to last forever, and that realization is picking up momentum. That’s actually good news. Remember, the Fed has a target of 2 percent for inflation. Presently, consumer inflation is up to 1.4 percent—still below that target.

The 2 percent figure is crucial because the Fed believes inflation should stay above that in order to lessen the possibility of sudden deflation due to any systemic shock (such as what might occur when the Fed ends its stimulus program).

If you’re planning on making any home-related financial decisions, this is probably a good time to go ahead with that. Given the steady and significant advances on all fronts, the housing recovery is about to reach a critical threshold beyond which rates will rapidly start going up all around. Mortgage rates will likely be the first to go up by a fair bit.

 

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