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Will Spring Thaw the Housing Market? 

Kristina Hooper 

The Upshot 

2/24/2014 

Instead of heating up further, the housing market has been feeling a chilly wind, writes Kristina Hooper. If credit standards don’t continue to loosen, making mortgages easier to get, higher mortgage rates could spell more trouble than just bad weather.
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Kristina Hooper, US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

While last week’s much-anticipated release of January FOMC minutes demanded most of the market’s attention, it’s also worth examining new housing data for insights into the state of the overall economic recovery.

Why? Because housing has been a key part of the ongoing US economic recovery, and although the housing market seems to still be on solid footing, a steady drip of weak data could create headwinds for the sector.

What happens to housing disproportionately reflects and affects the broader economy.”

Slower Home Sales Aren’t Just Weather-Related

The National Association of Realtors (NAR) released a key report last week, which showed that:

Existing home sales dropped in January by 5.1%—the lowest level of activity since July of 2012—which annualizes out to 4.62 million.
January home prices fell for the month.
First-time home buyers accounted for only 26% of purchases in January; historically, that figure is closer to 40%.

The NAR attributed at least part of the recent drop in sales to the weather, but stated that other factors also played a role: tight credit, limited inventory, higher home prices and higher mortgage interest rates.

HMI Drop Indicates Weaker Outlook

Also worth a closer look is the newly released February Housing Market Index report:

HMI fell to 46 in February—a record drop that was not only well below consensus expectations, but 10 points below the previous month’s reading.
Traffic fell 11 points to an anemic 31, the lowest level since last April.
Current and future sales also showed a drop, although they remain in growth territory.


This can of course be at least partially attributed to the weather, as sales in the Northeast in particular suffered during a rash of winter storms, but tighter credit and higher mortgage rates likely played a role.

Tough Sledding for Mortgages

A closer look at mortgage rates reveals they’ve risen significantly this year and are not far off from their recent highs. Prospective homeowners are clearly feeling the higher rates: Mortgage applications are down 17% for the 12-month period ending February 14, as reported by the Mortgage Bankers Association.

For additional insights, it’s worth looking at the Federal Reserve Beige Book, which provides a more holistic view of the economy than any individual data point. The Beige Book, which is based on surveys of economists and business leaders from the Fed’s 12 bank regions, suggests a slight loosening of credit standards over the past few months, but it doesn’t appear to be nearly enough to support the housing recovery.

Case in point: The NY Fed recently released research showing that there has been very little growth in mortgage balances in the past year, especially compared with 2005-2006, when credit was expanding rapidly. What’s more, the modest mortgage-balance increases that have occurred are largely from high-credit-score borrowers—not necessarily enough to support a broader recovery in housing.
Chart

Will Home Sales Start to Taper?

This week we will be treated to more economic data that will give us greater insights into the state of the housing recovery—which is significant given that housing is a particularly large, cyclically sensitive part of the economy. What happens to housing disproportionately reflects and affects the broader economy.

Think of it this way: Weaknesses in the overall economy show up as even bigger weaknesses in housing markets, as potential buyers and sellers wait until economic and financial conditions return to their favor.

Maybe more importantly, however, weaknesses in housing markets can magnify troubles in the broader economy. Just think of all the people in a given community who are affected by real-estate sales—from brokers, insurers, movers, bankers and lawyers to home repair stores, paint shops, furniture and flooring stores, and carpenters. Every house not sold puts a dent in the income of every one of these neighbors.

And, not insignificantly, the housing market plays an important role in consumer psyches. When home values are higher, consumers feel better about their economic standing and are typically more inclined to spend.

So here’s the bottom line: Economists at the Fed, in government and in the private sector will need to keep a sharp eye on all housing-related data over the next few months. Continued weakness could hold back acceleration in real economic growth. If this is significant enough, it could—although this is a high hurdle—cause the Federal Reserve to reconsider its timetable for returning money-supply growth and interest rates to more normal levels.


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Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.


A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
 
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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