Is The Housing Market About To Turn Positive?

One of the anomalies of the current economic rebound compared to past recoveries is the virtual absence of the housing market in the upturn. Not only has the housing industry – and its symbiotic partner, the mortgage market – failed to lead or even participate in the recovery, as it usually does, it’s been a laggard most of the way.

The main reason, of course, is the huge change in perception among young Americans about the attractiveness of home ownership. Most of them grew up during the housing boom of the early 2000s and the subsequent bust following the financial crisis – indeed, the housing bust was the root cause of the crisis – so homeownership for many of them has mostly negative connotations, as opposed to a symbol of the American Dream.

Then there’s the burden of student loan debt, which has made homeownership unaffordable for many, so it’s not hard to see why the U.S. homeownership rate has dropped to 64.3% most recently, down from the peak of 69.2% at the end of 2004.

Making matters even worse is the relative lack of homes for sale, which has created a huge supply-and-demand imbalance pushing prices in most areas of the country higher. The reason for the lack of supply is threefold: Older homeowners don’t want to give up the 3.5% mortgage they’ve refinanced into over the past several years. And many of them still can’t sell their homes at the price they want because the value is still below where it was 10 years ago. They’re also reluctant to sell their homes only to have to find a new home at an inflated price.

The recent jump in fixed-rate mortgage rates to 5% or so is only aggravating the situation.

Last week the National Association of Home Builders said its Home-Builder Confidence Index for November dropped eight points to 60, its lowest level since August 2016. That was also eight points below market forecasts. Granted, the market for newly-built homes accounts for less than 20% of the total housing market, but an eight-point drop in one month was a real eyeopener.

Wells Fargo, one of the largest mortgage lenders and servicers in the country, recently announced it was laying off 1,000 employees, 900 of them in its mortgage unit, due to an expected downturn in loan originations and fewer delinquencies and foreclosures. Lots of other mortgage companies have made similar moves over the past few months.

Should we be concerned? Is a drop in the housing market a harbinger of worse things to come in the overall economy? Would it be enough to push the economy into recession, which we keep hearing about more and more recently as stock prices drop?

Actually, I’m starting to sense that the housing market may be beginning to turn positive, even as the economy may be starting to lose some steam. That would follow the contrary path the two have charted over the past several years, only this time they may be reversing their respective courses.

I’m not predicting a massive upsurge in the housing market, don’t misunderstand. But I’m starting to think the market may have at least hit bottom, which I believe is some ray of positive light.

One reason is my belief that long-term interest rates may have peaked, at least for now (although I continue to believe the longer-term trend is for higher rates). The yield on the 10-year Treasury note – the benchmark for long-term fixed-rate mortgages – has now slid below 3.10%, down about 15 basis points since the recent peak earlier in the month. While that’s probably not a long enough time to hang your hat on and forecast continually falling rates, that’s what I see coming.

As we’ve seen recently, the drop in bond yields – and the rise in bond prices – has largely traced the decline in stock prices. And that’s not surprising. Nervous investors always run to the safety of government securities. That will soon translate into lower mortgage rates. Down to 3.5% again? Probably not. But I see mortgage rates hitting 4.5% or lower before they hit 5%.

The financial markets don’t appear to be giving enough credit – if that’s the appropriate word – to the results of last month’s election, or at least few analysts or “experts” are saying so.

Regardless of one’s politics, it’s hard to believe that the next Congress will be as pro-growth as the last one. The stock selloff would appear to be signaling that even if people aren’t saying it.

If that’s the case, we probably shouldn’t be surprised to see the Federal Reserve backing off its monetary tightening language going forward. A rate hike is already probably baked in the cake for next month, but don’t take any bets yet on what happens next year if the economic and inflation data change dramatically.

So if you’re in the market to buy a home, be patient. Your time to buy may be coming soon.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.