I do not know how many credit market columns I read last week that announced, lamented, and frantically worried about rising mortgage interest rates. It is as if a young couple fretted about the fact that their baby was reaching 22 pounds. For you people not from the US a pound is a unit if weight similar to a stone or a rock. Most babies start at about 6 pounds and keep gaining weight until they become tackles for an NFL team. It is perfectly natural for the child to reach 22 pounds at some point.
According to
the press, interest rates should not be allowed to grow up. I will admit that US interest rates got very
low. In fact a graph of the 30 year Conventional Mortgage Rate (let’s call this
interest rate Mort) shows that Mort has not been lower since 1965. http://research.stlouisfed.org/fred2/graph/?id=MORTG Despite recent increases in Mort, he is still below every single data
point since 1965 except the very recent time period starting from August 2010.
So rates are
rising but they are rising only in comparison to about two years of historically
low rates. Imagine living through a time period when the temperatures in Miami
in July were 180 degrees F. You would have to admit that 185F in Miami in July
is not normal. But then imagine when the temps went to 170F everyone started to worry about a coming freeze. People started cancelling vacations in Florida
because they thought it would be too cold. Crazy right?
The graph of
Mort is very clear. Starting in 1980 when interest rates rose to very high
levels, the trend has been downward. That is right, for almost 35 years,
Mort has been getting lower and lower. Of course there have been cycles around
the trend and that means there have been times when Mort rose. But every upward
phase was always followed by a downward one – one that left rates even lower
than when the phase started. Consider these average Mort rates ---
1985 to 89 10.7%
1990 to 94 9.2%
1995 to 99 7.6%
2000 to 04 6.7%
2005 to 09 5.9%
2010 + 4.2%
As I write
today Mort is about 4.5%. So it is higher than the 3.4% at the end of 2012 and
the 4.2% average since 2010, but it is now considerably lower than any of the
averages of the 5 year periods since 1965. It is also much lower than the
average of recent years before the world recession.
Why are we
so worried about Mort? The answer is that we are really worried about his
cousin Heloise (Housing Starts). Heloise has not been well. Heloise is a shadow
of her former self but has been improving of late. After coming in at a low ebb
of 478,000 units in spring of 2009, Heloise has been rising hitting about a
million starts in March of this year but settling in at a pace of over 850,000
starts since.
There is a
worry that if Mort rises more that this will diminish Heloise. But this does
not make any sense because it leaves out all those other variables that might
impact the demand and supply for housing. Even at one million units per month,
Heloise is more than a million starts below the previous annual peak and is
probably only 60% of what might be considered a past normal result. Heloise
remains weak despite super-record-low Mort. That means that there must be
something else besides Mort that is bothering Heloise.
That
something else is the same list of things that is keeping the general national recovery
at a slow pace and restraining employment. Among the items in that list is an
unfinished reform agenda that leaves banks and households uncertain about the
future of housing, banking, energy, healthcare and more. Interest rates can and will increase. But that should not be an alarming factor. It
should be just the opposite. The rise in interest rates is signaling a stronger
economy. The risk of another major
financial recession is slowly receding into the past. Output and incomes are
rising. Employment is increasing, albeit slowly. This foundation means that the
housing market will not vanish just because mortgage rates hit or exceed 5%.
While we
might not feel lucky the gradual US and world economic recovery will be a
good thing for Mort and Heloise. As Europe, Japan, China, and emerging nations
expand at a gradual rate, this puts less pressure on commodities and other markets
and should keep inflation in check for a while. This will keep Mort in check as
well. Note from the history cited above that trend Mort has come down for
almost 35 years. Much of that can be explained by a secular decline in inflation
and inflation expectations. So a key to Mort and Heloise happiness is keeping
those inflation expectations damped.
In short the
sky is not falling. Interest rates are going to keep rising as the economy gradually
recovers. Housing will not be unduly troubled as housing demand marches back to
more normal monthly starts. But a gradual recovery is not enough to guarantee
success. Much would be improved by a return to sane monetary and fiscal policy.
Removing stimulus means anchored inflation expectations. A sustained recovery is
impossible without it.
Heloise might still be ailing because she glutted herself before the major "correction" a few years back. In my area, there are many "new" homes which have never been, nor may ever be, occupied. Why add to the glut? Heloise may be, as the Aussies say, crook for a while yet.
ReplyDeleteFuzz,
DeleteYou could have said that a couple of years ago but housing starts doubled during that time period. Housing remains sick but it is slowly recovering over time. AS you say, it may not get back to previous strong sales, but it has a lot of room to grow before it gets there.
The current rates are very low. My mortgage ( 29.5 Year Fixed) is financed at 4.2%. That is quite different than my 2005 mortgage which was at 7.8% for the same amount of loan value. But that is not the issue here.The issue is housing sustainable with a slow growth economy and a large amount of new jobs being low pay and part time. When Bernake stops feeding money to the banks via QE what happens with the over abundance of money supply? Housing starts lean more toward multiple units or renting which does require less income per square foot. The market is dictating that MC Mansions are mostly a thing of the past because there is not enough in the market to support any real growth here. Boomers are selling their homes and either buying town houses or renting. What part of the market do boomers make up? How long will the uncertainty continue...it seems the President creates or welcomes one distracting crisis after another to deflect attention on the real issues.
ReplyDeleteBTW if any of you conservatives think government does not create jobs check out the newly installed handicap lifts at all pools in the USA. Our has not been used since it was installed. We do have a lady with polio who comes to the pool and users her walker to enter the water. Think of the sole factory that makes these things and the service company. They did not exist prior to to the Executive Office initiating a change in the OSHA rule...I wonder who was the lobbyist.
Also think about the 30,000 employed who tell people about the Affordable Care Act. Or the other group ( very large) who get free cell phones..sometimes multiple issues. Government creates unsustainable jobs.
James, as I said to Fuzz above, moderate growth is sustaining a recovery in housing and even more moderate growth will continue that process. As for Bernanke, he will only plan a very small reduction in amount of money entering the economy. But keep in mind that he already poured enough money in to last a lifetime. Thee is plenty of money to grease the wheels of finance. As economic growth continues and confidence improves, more of that money will be converted from excess bank reserves into loans.
DeleteI hope so. Some manufacturers are discovering that back-shoring cost less than off-shoring. We shall see because an economy cannot be built to last on just buying and selling capital. The stimulus to this , I think, will be when the off-shore countries can begin selling in large quantities to their own people.
ReplyDeleteJames, that is a while different topic. I wouldn't bet my horse on back-shoring. Our economy will do just fine without it so long as we get the government out of the way of the economy and let it recover from the recession. This economy is quite capable of creating a lot of jobs and lower unemployment.
DeleteWhen I read Dr.D's optimism I get that Tinglely feeling up my leg; until. I remember that The Far Left controls the Senate and White House. Progressive policies such as QE 1,2,3..., Stimulus for Cronies(and new voters), unrealistic EPA Regs have transformed our Free Market into something that does not resemble true Free Enterprise. Hard to use past Economic Cycles as a yard stick because the rules keep changing.
ReplyDeleteFor me it is hard to stay excited about the Market until I see more American's are holding full Time Jobs.
Unfortunately Danny, no one can be dismal enough for you. I proudly wear the mantle of the dismal science. I had a simple point -- that rising mortgage rates will not do much damage because it is not mortgage rates that are holding back housing and the rest of the economy. Even with 2 percent economic growth, the housing market will continue a very slow recovery. What we would all rather see is a strong economy -- and as you say there are a lot of negative factors out there preventing a better outcome. But clearly if some of those negative factors were to recede and the economy prospered -- mortgage rates would rise and they would not kill off the recovery.
DeleteBy the way -- I am a lover of free enterprise and I lament our current direction -- but I am wondering if you have found a nice place on this planet today where they practice in your words "true free enterprise." Are you sure you are holding us up to a benchmark that really exists? Would you ever be satisfied?
Mortgage rates play an essential role especially for the people who want to get their homes. It is very essential to select good rates to avoid financial crisis in the end.
ReplyDeleteDear LSD. You back up your arguments with good stats and most (non-Macro PhD) folks would find it difficult to refute your conclusions. But—I know this is unintended—your statistics are not complete. While you paint a (slightly faded) rosy pic of the economy and housing, there is a thorny side. Yes, mortgage rates are low and most likely will remain—that’s the good newz. The bad newz is that lenders, having been burned by the Lib/pRegressive effort to social engineer housing that forced them to lend to everyone regardless of ability to repay, have returned to much much tighter credit guidelines that keep marginally credit-worthy potential home buyers out of the market. (But, I recently learned of a non-profit org—don’t recall the details—that lends with NO MONEY DOWN—geese!) Also, folks (many ferign) with mega $$$ are scooping up homes (for investment) and paying top cash $$$ thus increasing the average SP of houses and reducing inventory. So, even though rates might be affordable for now and in the near future, higher prices and decreasing inventory are keeping the housing infant from growing out of diapers. A nudder factor that is impeding housing is the lack of good paying yobs that would support a credit application (damn, that Obummer had better recharge that laser he said several times he was gunna focus on yob creation! . . . ooops . . .oh, hello, NSA). So (again), while your macro brush paints that faded rosy pic the infertile canvass prevents the paint from blooming.
ReplyDeleteCharles,
ReplyDeleteThis pretty much what I said to Danny above...My point was not that the economy is strong or that housing is back. My point was simply that rising mortgage rates would not itself be an alarming factor for housing. I agree with all those things you said -- we won't get strong economic growth without addressing our real problems in housing, finance, energy, immigration, etc.