A better job market, in turn, will revive consumers’ assessments of economic conditions and help buoy consumer spending. The "present situation" component of the consumer confidence index (Conference Board series) slipped to a cyclical low in August, reflecting ongoing concerns about the job market. But history shows that this series can rebound rapidly when the labor market (which typically lags behind GDP) firms up.
The housing market charges into the third quarter …
The housing market certainly is part of the overall pattern of economic strength moving into the third quarter, following a robust performance in the first half of the year. Total housing starts hit a 17-year high in July (1.87 million units at an annual rate) and single-family starts hit a 25-year high (1.52 million). Starts of multifamily units slipped a tad (to 351,000) but still were above the averages for the first two quarters of the year.
Single-family builders are simply striving to keep up with robust demand for homes, and inventories of homes for sale are at historic lows (3.5 months’ supply at the end of July). Indeed, merchant builder sales of new homes hit a record 1.2 million units in June (seasonally adjusted annual rate) and were off less than 3% in July (the second highest month on record). Sales of existing homes hit a record high in July (6.12 million) and total sales (new plus existing) stood at a record 7.28 million for the month.
NAHB’s survey-based Housing Market Index staged a solid increase in early August, signaling ongoing strength in the single-family market. The Mortgage Bankers Association's weekly survey of lenders shows that applications for mortgages to buy homes slipped during the first three weeks of the month from the record high in late July, but this series remains quite strong on an historical basis. Thus, the single-family housing beat apparently goes on despite the jump in long-term mortgage rates from their historic lows in June, and the multifamily sector still is hanging in there despite high vacancy rates and low absorption rates in market-rate rental housing.
The strong close to the second quarter, and the strong housing indicators for July and August, have residential fixed investment (RFI) poised to deliver another solid contribution to GDP growth in the current quarter. RFI contributed more than one-third of overall GDP growth in the first half of the year, and another positive contribution is in the cards for this quarter as well.
Mortgage refi's contract but housing equity still is accessible …
Refinancings of home mortgages soared to a record pace in June as long-term mortgage rates sank to 45-year lows, and the refi market has shrunk dramatically since then as rates have rebounded. Indeed, the refi share of mortgage applications has fallen from more than three-fourths to about one-half during this period, and further declines are likely.
The massive refinancings that occurred when mortgage rates were falling have strengthened household balance sheets and lowered debt-service burdens, and those effects will endure. The contraction in refi activity, of course, has squeezed a key channel of low-cost access to housing equity, and this development has potential negative implications for remodeling and consumer spending in general.
But it’s worth remembering that large amounts of accumulated housing equity typically are tapped when existing homes are bought and sold, and the sales outlook remains quite good. Furthermore, home owners obviously can use home equity loans to access housing equity, and these loans typically have interest rates tied to the bank prime (the prime, in turn, is tied to the federal funds rate). The prime rate has not risen at all since June, and Fed policy is likely to hold this rate at 4% well into 2004.
Long-term rates now are reasonably well behaved …
The jump in long-term interest rates from the June lows (about 140 basis points for the 10-year Treasury yield) certainly has been enough to rattle the nerves of financial market participants and economic forecasters alike. But much of the rate rebound represented a snap-back from unsustainable lows that were based largely on unrealistic expectations about Fed policy — including expectations that the Fed would use unconventional monetary policy tools to drive long-term rates downward. Indeed, the abrupt rate adjustment seemed to run its course by the end of July, and long-term Treasury yields have shown little change, on balance, since then.
It’s entirely possible that long-term rates will hang around current levels over the balance of this year and even into 2004. The Fed has virtually committed to keep short-term rates stable for quite a while, the term structure of Treasury yields already has a very steep slope (more than four percentage points) and inflation fears should not invade the bond market for some time.
Reflecting all these factors, NAHB’s forecast shows a 10-year Treasury yield that does not deviate far from the current 4.5% range through mid-2004 (on a quarterly average basis). Beyond that point, Fed tightening and some firming up of the inflation picture should take rates up further, and large federal budget deficits promise to be an aggravating factor as well.
The mortgage finance system is performing very well …
As we expected, the spread between the long-term home mortgage rate and the 10-year Treasury yield has narrowed as the rate structure has moved upward, reflecting lower probability of early prepayments on mortgage investments. The spread has narrowed by about 25 basis points so far. Further narrowing is likely to develop in the months ahead, helping to absorb the impact any further increases in long-term Treasury rates has on housing.
The mortgage finance system also is equipped with a wide range of alternatives to the standard fixed-rate loan, and adjustable-rate mortgages (ARMs) tied to short-term market indexes have been gaining in stature as the yield structure has steepened. The MBA reports that ARMs accounted for nearly one-fourth of applications for home mortgages in the third week of August, up from 13% of the market when long-term rates bottomed out in June. History shows that the ARM "shock absorber" can provide considerably more cushion to the single-family market if long-term rates should rise more than we currently are projecting.
NAHB Chief Economist David Seiders analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his Aug. 27 e-newsletter. To subcribe to “Eye on the Economy,” click here.
Want more economic information? Find it in our publications.
Find more in-depth information in our three economics publications, Home Builders Forecast, Housing Market Statistics and Housing Economics. All are availaible by subscription.
- Home Builders Forecast includes analysis of single-family and multifamily residential activities, residential remodeling and the full range of nonresidential construction as well as the macroeconomic factors such as GDP, employment and interest rates that drive construction. If your business depends on reliable estimates of housing starts, construction spending and remodeling activity, Home Builders Forecast is designed to meet your needs.
- Housing Market Statistics contains an overview of important developments and trends that serves as an executive summary of the current industry situation. It also contains annotated charts depicting movements in key indicators and tables providing monthly, quarterly and annual data for more than 250 variables.
- Housing Economics provides a rigorous monthly overview of the economy, along with monthly data for more than 100 local markets and in-depth analyses of the niches and nuances of home building markets. Available online or in print, it is written in terms that builders, manufacturers and housing finance professionals can understand and apply to their own businesses.
To learn more or to order any of these three NAHB economic publications, visit the Economics Publications Information section of the NAHB Web site or call 800-223-2665.
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