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Housing Starts Recover; Home Builders Are Unimpressed Bookmark and Share

 

Housing Starts

Home-builder sentiment has turned a bit dour of late. The housing market index -- an indicator of home-builder sentiment -- dropped to 64 in July. This is the lowest reading since November.  Sentiment has trended lower since peaking in March.

The latest sentiment report cited high lumber costs as one reason for the tempering optimism. (This is one of many reasons why the tariff on Canadian lumber is bad economics.) It also cited moderating buyer traffic. 

Builders still have reason to see the cup as half full, though.  Starts picked up since last month. Starts posted at 1.215 million on an annualized rate in June. Single-family starts rose to 849,000 on an annualized rate. These numbers were higher than most analysts had expected. 

Better yet, permits point to starts trending even higher. Permits were up 7.4% for June compared with May. Year over year, starts are up 5.1%. Construction activity remains brisk. 

Perhaps builders have tempered their optimism because they have had a good run for so long. The iShares Dow Jones US Home Construction Fund, a fund of publicly traded home builder stocks, has doubled since 2012. 

But the longer you’re into the run, the harder it is to maintain the pace: materials, land, and qualified workers become more difficult to secure on the margin. Costs rise, and these costs weigh on operating margins and profits.  The sky is never the limit. 

But neither is Hades. We don’t see housing (and home building) trending toward the downside. The market is still strong, though we wouldn’t be surprised if it’s less strong going forward than it has been in recent years. 

Housing has been the one constant (constant good) in the economy for the past five years. There are no signs it will relinquish its standing in the near or distant future.  We see it that way, and so do most home builders. Home-builder optimism has dropped in recent months, but home builders are still mostly optimistic, and rightly so.

 

Mortgage Rates Pullback; Is More on the Way?

We still think the long-term trend will be up, even if the ascent adheres to only a slight grade. 

We refer to mortgage rates.  With the Federal Reserve determined to raise the federal funds rate multiple times, lending rates across the spectrum -- type and time -- have to rise. At least that’s the way the dynamic has generally worked in the past.

The short term is a different story. Mortgage rates have drifted lower over the past week. This is no surprise given Fed Chair Janet Yellen’s soft comments on the Fed’s strategy of raising interest rates: The Fed targets minute incremental increases delivered over an expansive amount of time. 

The yield on the 10-year U.S. Treasury note is down 10 basis points over the past week. Quotes on a prime 30-year conventional mortgage aren’t down quite that much (at least not in most markets), but they are down. 

We noted last week that pullbacks this year have offered an opportunity to lock in a mortgage rate. But you don’t want to lock too soon if you think more pullback is in store. If patterns are examined, and if they replicate, more pullback could be in store. 

Mortgage rates rose from mid-April to mid-May, but they subsequently rolled over into late June. Quotes on a prime 30-year loan were down to 4%, and below that depending on when someone sought a quote. Before April, we saw rates run-up into March and then pullback into mid-April.  (The cycle also occurred in January.) 

This recent pullback has been subdued compared to previous cycles.  With recent economic data being subdued, rates have little impetus to reverse in the immediate future. In other words, we see comparatively less risk involved in floating a mortgage rate today compared with last week. We say, “comparatively less risk” but not no risk. 

 

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