The goal of our U.S. Building Market Intelligence newsletter is to help building executives understand the outlook for the U.S. housing market. We find that newspaper headlines are often misleading and cause, at best, confusion in the executive suite.
While reporters play a vital role in our country, acting as a watchdog to make sure businesspeople, politicians and others aren’t pulling the wool over consumers’ eyes, we think they go too far when they put the negative spin on positive news. Last week’s employment figures, which were generally positive but received negative headlines because the growth was “less than expected,” are just the latest example of misinformation.
The U.S. housing market is on stable ground, with job growth returning, mortgage rates near historical lows, and outstanding demographics. When conditions change, we will tell you. Here is our current report card on the economy and the housing market.
Economic Growth: C
The economy continues to improve with an annual economic growth rate of 8.2 percent and payroll employment growth that is edging ever closer to positive territory.
Retail sales increased 0.9 percent in November and retailers generally reported excellent sales during the holiday season, so we expect good figures for December as well.
Leading Indicators: B-
Businesses are buying more as evidenced by the rise in The Purchasing Managers Index to 62, a very high level this month, indicating that businesses are spending more. With retail sales rising as well, both capital and consumer spending are on the rise.
Mortgage Rates: A
Fixed rates dipped 17 basis points to 5.85 percent this month for a 30-year, fixed-rate conforming mortgage. Despite the drop in fixed rates, the percentage of adjustable loans increased to 30.4 percent.
Adjustable-rate mortgages have regained popularity of late, despite interest rates that are near 40-year lows. Last month ARMs constituted 30.4 percent of home loans, the highest level since early 2000 and a level that is approaching the all-time high of 35 percent. ARMs include loans that are fixed for a number of years, then change to adjustable.
ARMs are on the rise for all of the following reasons:
Affordability. Many first time buyers need adjustable-rate loans to qualify for a home. These buyers are exposed if rates rise significantly, but they are not the only reason ARMs are rising.
Retirement Planning. Many homeowners, particularly Baby Boomers, are opting to refinance their home with an adjustable-rate mortgage with the intent of maintaining the same mortgage payment and amortizing the loan more quickly. Since the youngest Boomers turn 40 this year, they realize they should pay off their mortgage in less than 30 years.
Confidence. Buyers of all ages are becoming more confident that rates will not rise significantly in the future. With a 2.13 percent spread between fixed and adjustable mortgage payments, buyers are willing to take the risk to save on interest payments.
Consumer Behavior: C
Consumer confidence and consumer sentiment decreased slightly this month. At 91.3, consumer confidence remains relatively low in comparison to history.
Existing-Home Market: B
Existing-home sales fell this month to 6,060,000 annualized sales, as inventory increased to 5 months’ supply. The Purchase Mortgage Application Index also fell, which means there are slightly fewer households looking to buy a home than there were several months ago. All of these figures are adjusted for seasonality.
New-Home Market: B+
Annual new-home sales volume dropped slightly in November to 1,082,000 sales. The median sales price increased sharply in November, but since the figure tends to be very volatile on a month-to-month basis, we will have to wait to observe a broader trend.
Housing Supply: C+
Both housing permits and starts fell slightly this month. However, total supply remains high relative to history at more than 2 million units. With more households than ever and historically low mortgage rates, we would expect starts and permits to be near an all-time high.
John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.
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