US housing’s resilience
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The Q2 results from Wells Fargo and JP Morgan have again raised the issue of declining mortgage refinancings (if rates stay elevated), along with spurring more general worries about the housing market.
Here’s the
Wall Street Journal on Friday:
Chief Financial Officer Marianne Lake told investors Friday that mortgage refinance volumes could drop substantially if interest rates remain unchanged or rise. During a conference call with investors after the bank reported second-quarter earnings, Ms. Lake said pressure on the mortgage refinance business from the sharp rise in mortgage rates in June continued into July.
“We expect it could have a significant impact on the refinance market side and the second half of the year,” she said. “If mortgage rates stay at or above current levels, the market could be reduced by an estimated 30% to 40%.”
Okay, but refinancings had already been declining since much earlier in the year, well before rates shot up in the past couple of months. And it was always
inevitable that the refi wave would recede this year as the number of eligible borrowers dwindled.
From a macro perspective, refinancings certainly help, but not as much as housing construction activity — and the relationship between rates and mortgage
purchase applications
remains unclear right now.
For more on this, here is RBC Capital in a note this morning:
It continues to amaze us that the back-up in mortgage rates is being characterized as the potential death-nail for the housing market. Let us state this emphatically once again: the relationship between mortgage purchase applications and mortgage rates in the current cycle is nonexistent. While these variables were strongly correlated in normal times (between 1990-2007), this relationship was flipped on its head following the collapse of the housing market. If we are now indeed “normalizing,” mortgage purchase applications/home sales still have room to rise even if rates keep moving higher.
The point is not that rising rates are irrelevant, merely that the momentum in housing markets is still favourable and the higher rates are unlikely to have really hit housing affordability much. There remain big supply-side problems and a particular issue is that banks have loosened lending standards for all other kinds of borrowing other than for mortgages.
But the housing recovery still continues, even if it continues to be inconsistent and halting, and we don’t think the rise in rates will stop it altogether.
Meanwhile, a note by Capital Economists repeats some of these points and also discusses a trend we hadn’t given much thought to — the impact of unexpectedly low cost of lumber and building materials.
From the note (click charts to enlarge):
– At the start of the year, homebuilders expected rising building material prices to be the biggest constraint on housing starts in 2013. (See Chart 1.) Overall residential building material PPI inflation has actually turned out to be subdued this year, averaging 1.5% so far in 2013, relative to 2.5% in 2012 and 7% in 2011. But lumber price inflation peaked at 50% y/y in April. Judging by the declines in the NAHB homebuilder confidence index in February, March and April, that rattled homebuilders.
– The 25% drop in lumber prices since then, from $449 to $340 per 1,000 board feet, has come as something of a relief. It means that lumber price inflation is now weighing on overall residential building material PPI inflation. (See Chart 2.) And it has been accompanied by an eleven-point surge in the NAHB confidence index. (See Chart 3.) Even if lumber prices were to go on to make up all of their recent decline by the end of this year, lumber price inflation would peak at a more moderate 20%.
– With building material cost pressures easing, what threat do rising borrowing costs pose to the homebuilding recovery? Higher interest rates have certainly taken a toll on homebuilder equities, which have seen price falls of 22% since May. (See Chart 4.) But the impact on physical construction volumes may be hardly noticed. After all, the market share of smaller builders who are most dependent on bank lending has plummeted since the peak of the market. Meanwhile, with rates still low in historical terms, home buying demand will hold up in the face of slightly higher mortgage costs.
– The bottom line is that the construction recovery is nowhere near ended. The building permits numbers point to a decent gain in housing starts in June (data out Wednesday). And with starts still well below historically normal levels, homebuilding volumes will keep rising for some time after that…
