Housing Maintains Its Market Lead
Housing has been the one constant since the 2008-2009 recession. Housing has consistently trended higher with activity.
We’ve seen it in new-home sales. We’ve seen it in new-home starts. Starts, in particular, appear to have moved to a higher plane.
Starts rose 3.3% to 1.297 million on an annualized rate in November. Starts for single-family homes, up 5.3% for the month to 930,000, are the highest since September 2007. Should starts maintain the trend in 2018. We expect that hey will. Starts could finally hit the historical 1.5 million annualized rate heading into 2019.
The trend in starts, backed by improving sales, has lifted home-builder optimism. Sentiment has trended higher over the past three months. he home-builder sentiment index hit a new expansion high of 74 this month. Home builders are down-right giddy. Their sentiment points to rising starts and higher new-home sales in 2018.
The NAHB estimates that housing’s combined contribution to gross domestic product averages 15%-to-18% annually. This includes construction, remodeling, broker’s fees, among other things. New investment averages 3%-to-5% of GDP, which is still a lot. Given the surge in activity to end 2018, new-housing activity should maintain its contribution at the high end of NAHB estimates.
Sales of existing homes show signs of ending 2017 on a high note. Sales rose 5.6% to 5.81 million on an annualized rate in November. This was the highest monthly sales reported since December 2006. The sales gains reported in recent months have lifted the year-over-year growth rate to 3.8%.
We can point to the South for the strong showing. The recovery following Hurricanes Harvey and Irma has lifted overall housing activity. Existing-home sales in the South were up 8.3% in November.
Extending the trend into the distant future could prove difficult, though. Supply is still an issue. The number of existing homes for sale dropped 7.2% to 1.67 million last month. This is the second-lowest reading since 1999. Inventory has dropped for 30-straight months on a year-on-year basis. At the November sales pace, supply would be exhausted in only 3.4 months.
Higher prices are the corollary to lower supply. The median price of an existing home rose to $248,000 in November. The latest gain marks the 69th consecutive month of year-on-year price gains.
A great end to 2017 from a housing perspective. Yes, interest rates, in general, and mortgage rates, in particular, have trended higher as we round out the final two weeks. We doubt that they’ll trend so high as to become a drag on the economy or on housing.
Keeping you informed on events this week that may create volatility in mortgage rates.
Econmic Event Release Date and Time Consensus Estimate Analysis
Mortgage Applications Mon., Dec. 27,
7:00 pm, ET None Important. Recent weekly declines in purchase applications point to slowing sales momentum heading into 2018.
S&P/CoreLogic/Case-Shiller Home Price Index
Wed., Dec. 27
9:00 am, ET 6% (Annualized Increase) Moderately Important. Prices continue to rise in most markets Case/Shiller follows. The West Coast continues to generate the most price gains.
Pending Home Sales Index
(November) Wed., Dec. 27,
10:00 am, ET 110.5 Index Moderately Important. Gains are strongest in the South following the hurricanes. Activity there should lift the overall index higher.
Sustained Momentum Into 2018
Market participants are expecting a lot now that tax reform is a done deal. Investors anticipate a ramp-up in economic growth and in corporate earnings. Stocks have rallied in the past week. The bull market that began in March 2009 is now expected to extend deep into 2018.
Growth expectations register in interest rates. The yield on the 10-year U.S. Treasury note has broken out of its 2.3%-to-2.4% range to approach 2.5%. Mortgage rates have also trended higher. Quotes on the prime 30-year fixed-rate conventional mortgage have trended up to 4.125% on the national level, according to Mortgage News Daily.
Mortgage rates could continue to trend higher…or they couldn’t. It’s possible the rise in Treasury yields and mortgage rates was the product of an outburst of market enthusiasm that will subside. Exceptions frequently diverge from reality, and the reality is that realized economic growth could lag current expectation.
Despite the changes in the tax code, many of which appear to disfavor housing and mortgage lending, we’re still bullish on housing and mortgage lending. We see another year of sustained (though moderating) price appreciation and increased lending activity. We don’t expect rising interest rates (if that occurs) to reverse the dynamic.