The Direction of Housing? Take a Look at Interest Rates, Prices and Inventory Levels

From late-December through mid-January, mortgage rates experienced a correction following an abrupt post-election spike.

By the end of January, the financial markets had a chance to react to the first week or so of a new Administration. The result was higher stock prices, which pushed bond yields higher and sent mortgage rates higher.

What impact is all of this having on housing? Here are a few of the short-term effects:
  • We’ve already seen effects on refinancing activity, which is to be expected any time rates increase quickly.
  • Home purchase transactions have been much less affected by the rate spike, but that’s partly due to the timing of housing reports. Existing home sales fell moderately.
  • The most interesting component in the analysis of housing markets is inventory. According to the National Association of Realtors (NAR), by the end of December the inventory of existing homes shrunk to the lowest level in NAR’s records which date back to 1999. 

Although some sales aren’t counted because they’re not occurring in traditional channels, and mobility needs have decreased thereby lowering home-buying, more tangible factors account for low inventories:
  • The combination of rising prices of new homes coupled and rising rates looks to be preventing would-be new home buyers from moving up. Consequently, they’re not adding their existing homes to inventory.
  • Yearend data for new home sales shows a sharp fall in sales while prices remained pressed up against all-time highs.

This is all part of the “Catch-22” of new fiscal policies and a potentially growing economy:
  • If the economy grows at a faster pace and fiscal policies add to inflation pressure, rates will continue to rise. And, of course, higher rates hinder activity in housing markets.
  • Decreased economic activity and inflation pressure could allow rates to fall again, but most experts agree that’s a ways off.
For a more in-depth discussion of this topic, check out “Rising Rates, Higher Prices, and Record Low Inventories” by Louie Colatriano, EVP, Finance at Stearns Lending, LLC.

Source Material
1. Rising Rates, Higher Prices, and Record Low Inventories. Louie Colatriano. US Housing and Mortgage Market Weekly. Web. 27 Jan. 2017. Web. 06 Feb. 2017.

- By Michael Kearney, Feb 16, 2017