Although the NAHB index of homebuilders ticked down in October, the index remains substantially higher than last summer's lows. Furthermore, the prices of homebuilder stocks are up an average of 140% from their lows of last November. All of this continues to confirm that the bottom in residential construction occurred a few months ago and that activity should start improving soon.
Scott, Thanks for taking the time to run this blog. I am 2 years in the business and find your blog extremely helpful.
ReplyDeleteWhat are you thoughts on how the housing market will react once the Fed stops keeping mortgage rates low ? Are we looking at a situation similar to that of "cash for clunkers" in which a gov't program has borrowed sales from the future ?
I've argued in several earlier posts that I don't think there is much evidence that the Fed is keeping mortgage rates artificially low. Fed purchases are only a small fraction of the Treasury and MBS market, and I don't see how that small fraction can distort the prices of the entire market.
ReplyDeleteI think yields are low mainly because a) the Fed has convinced the market that short-term rates will be very low for a long time, and b) the market doesn't believe that inflation will be a threat.
I have also argued that rising yields would not necessarily be a bad thing for housing or the economy. If higher rates were caused by a Fed tightening, that would boost confidence in the dollar and that would in turn be good news for the economy. The expectation of rising mortgage rates could also push marginal buyers to act sooner rather than later. Rates could go up a lot before they became problematic.
Further to the above: rates are also low because c) the market has very dismal expectations for the economy. If rates rise because the economy picks up, then higher rates will be welcome.
ReplyDeleteBy the time the Fed stops buying MBS, the economy will probably be doing a lot better, and that will buoy confidence and offset most of the adverse impact of higher rates.
But the FHA distorting the housing market by shoveling out billions to unqualified lenders does not pose a threat at all?
ReplyDeleteThere is already a bubble 2.0 in housing and the next batch of borrowers are no better than the last batch of clunkers.
It does not matter if it is the fed or the FHA, someone is severely distorting the housing market by giving out cheap loans to unqualified buyers.
"Scott Jagow at American Public Media MarketPlace provides an example of a recent FHA insured loan homebuyer: On the flip side...
Denise works three jobs so she can afford her new house. She makes $2470 a month but pays $1328 to service her mortgage. That means 54% of her income goes to the house, leaving her with $285 a week to live on. Doable, but tight. She’s breaking the 30% rule and then some, not to mention she’s still spending out of pocket to renovate the yard, fix the roof and paint.
Her loan is a 30 year fixed loan from FHA, with a 5.1% interest rate. She got a 203K HUD supplemental loan from HUD, on the same terms, to renovate the home. In the end, her total loan is 183K in size."
"First-time home buyers accounted for 42% of home purchase transactions in September."
ReplyDeleteFunded by Big.Gov. Our future rest in the hands of folks like Denise. I wold loan her cash at around 19%, so why is our government dolling it out at 5%?
"I don't see how that small fraction can distort the prices of the entire market"
ReplyDeleteAs the aim was to distort prices, I take it you think the entire $1.25tn was wasted? Kind of an academic question, but I'm curious.
MW: good question. I would say that yes, the money was wasted if the intent was to distort prices. But there was another, more important intent, and that was to ensure that the world's greatly increased demand for dollar liquidity was satisfied. On that score, I think it was successful. But of course it is past time for the program to start being unwound, so now it is beginning to impose an unnecessary waste on the world's financial system.
ReplyDeleteThanks. I'm pretty sure the intention was to make as many mortgages as possible eligible for refi, and trying to affect yields and spreads was how they did that/tried to do that.
ReplyDelete