The Mortage Interest Rate Wild Card
Three stars aligned–home prices, interest rates, and first-time buyer/new-home tax credits. Toss “seasonality” into the mix of positive catalysts, and you can start discounting the nascent March, April, May run in housing as a marketplace behaving the way an injured athlete does after a big cortisone treatment. He might look okay for a while, but you can only wonder whether and how long the painkilling effect will last.
Now, just when data starts rolling in that supports this alignment, interest rates have begun shaking loose from their virtuous bond with more affordable house prices and a kick-back from Uncle Sam or a state for a home purchase.
The Wall Street Journal leads this a.m. with its take on the quantum leap percentage point-plus increase in mortgage rates since the end of May.
“Mortgage rates at these levels will hobble the [housing] recovery, and it was just the beginning of the recovery,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
Investors have been anxiously watching bond yields climb over the past few weeks, pushing up mortgage rates, which normally track 10-year Treasury notes. The yield on the those briefly hit 4% on Wednesday afternoon for the first time since mid-October before ending the day at 3.937%.
Many policy makers see the rise in Treasury yields as a sign that investors are optimistic that the economy is on the mend. But many market participants say higher long-term bond yields indicate investors are increasingly worried about inflation.
What unfortunate timing! Look at a key “take-away” from Wachovia senior analyst Carl Reichardt’s latest “Neighborhood Watch Survey” of new-home community sales managers.
With three straight surveys and a broader base of SMs reporting better-than-expected sales and traffic, we now believe that field conditions saw their low ebb in early 2009. While seasonality plays some role in our data, SMs expect strength this time of year, yet still see activity above these expectations.
This verbiage is rosy, given where it’s coming from. Reichardt notes that upward pressure on interest rates may stall the new-found momentum. Other analysts point also to the fact that tax credit programs for first-time home buyers expire on a Federal level by the end of calendar 2009, and state-funded programs will only last until the coffers run dry.
Hanley Wood Market Intelligence has done an extensive market-by-market analysis that ties the effecitve date of California’s $10K tax credit to new-home purchase activity. The Orange County Register’s Jonathan Lansner quoted the HWMI study at length in his blog post about how the O.C. was SOL when it came to an upside of the combined California and U.S. government tax credits for home purchases.
Click to Enlarge graph of Hanley Wood Market Intelligence Data.
Costa Mesa-based Hanley Wood Market Intelligence reports that Orange County buyers signed 35% fewer sales contracts for new homes in March and April, the first months of a homebuyer tax credit designed to spur the purchase of newly built residences.
The California program gives homebuyers a tax credit of up to $10,000 for new single-family homes selling after March 1. (Uncle Sam will chip in another $8,000 if you’re a first-time buyer!) But while demand has been high statewide for the California tax credit, that has yet to impact the pace of sales and construction here:
What Lansner neglects to report on is whether the 35% decline year-on-year for the two-month March/April period is more or less than the decline year-on-year from, say January-February of 2009 from a year earlier.
He does acknowledge that statewide, the $10,000 tax-credit appeared to have jumpstarted sales in many communities.
In Reichardt’s Neighborhood Watch survey, he notes:
Trends in the West — especially No Cal — made a surprising turn as SMs cited the strongest sales trends compared to expectations.
The big question post the “Spring Selling Season” uptick must be how to keep whatever momentum there is in the market going through the balance of the year… especially without the critical tailwind of low, low interest rates.
California, as of June, is said to be 85% through its $100-million allocation for home buyer tax credits, and nobody expects below 5% home loan rates to come back to roost anytime soon.
Here’s Calculated Risk’s take on mortgage rate trends, and how to stay ahead of the curve on them:
Here is a new tool from Political Calculations: Predicting Mortgage Rates and Treasury Yields
This is based off the chart I posted last Friday and is very timely with the Ten Year Yield pushing 4%.
Using their tool, with the Ten Year yield at 3.99%, this suggests that 30 year mortgage rates will rise to 5.8% based on the historical relationship between the Ten Year yield and mortgage rates.
The question is, does the demand resubmerge when the three stars are not in alignment? Will those who move off the sidelines because of the sense that “there will never be a better time to buy” now begin to feel they’ll do better if they wait out further house price declines?
As most new-home builders have discovered, the monthly payments riddle is the one they need most critically to solve. If interest rates go up, prices have to go down to solve that riddle.
It strongly suggests that in the current policy environment, a strong likelihood is that Fix Housing First’s original plan for both a compelling tax credit and a mortgage buy-down may do the trick of sparking demand, clearing more inventory, restoring scarcity, and putting a new floor of value under residential real estate.
We see a Stimulus 2.0 package emerging during the Fall session of Congress, designed to capture any green shoots still out there, and accelerate the economy’s ability to begin paying down the “Wall of Capital” with which the Fed and Co. met the economic crisis starting last Fall. A mortgage buy-down might likely be in that program, to test new residential construction’s capacity to serve an accustomed role as an engine driving the broader economy.
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I could not agree with your evaluation any more if I tried. I just did the same analysis in Nashville (http://remarkablehomes.blogspot.com/2009/06/may-2009-nashville-real-estate-market.html) and while the 2009 numbers look great, compared to 2008 they are quite dismal.
I am really looking forward to stimulus 2.0 this fall, it will be the true test.