What can slow down the demand for housing? The 10-year yield above 1.94% could
The Census office‘s new home sales report released on Tuesday hailed yet another defeat in the housing bear disaster forecast for 2020 after COVID-19 hit our economy. There has perhaps never been another time in American history when bears have breathed so severely.
When we compare this recession to the previous one, instead of a real estate crash, we have a housing market that outperforms all other sectors in the world, during the most impactful economic and health shock in modern history.
It’s a lot of hyperbole, but it’s all true.
New home sales
The Census Bureau reported that sales of new single-family homes in July 2020 were at a seasonally adjusted annual rate of 901,000, 13.9% above the revised June rate and 36.3% above the estimate of July 2019 from 661,000.
You may have heard from others that low inventory is reducing sales, but apparently we had enough supply to drive demand to pre-cycle highs even with a drop in the market. monthly offer in previous reports.
Let me repeat this for the kids at the back of the class – we have pre-cycle demand spikes with new cycle lows in inventory.
Yes, it works like that.
As we go from the weakest housing recovery on record to the best demographic patch on record, we have built-in demographic demand. Yet the market is not overheating, even with mortgage rates this low.
And mortgage rates are important to the market, even if they are currently historically low. Higher mortgage rates, even if they remain below 5%, impact demand.
In May 2013, I wrote about the impact of rising mortgage rates on demand. We did not yet have the right demographic patch to handle higher rates. To disprove this idea, housing experts pulled out their mortgage calculators to show how much the monthly payments would increase with the increase in the mortgage rate. But apparently that’s not how potential buyers see it.
History doesn’t lie.
When we look at the rate hikes that took place in 2013/2014, we see that demand has taken a hit. This was especially true in the new home sales market, which missed sales estimates by 20%, even though sales were compared to historic lows.
In 2013/2014 and 2018/2019, higher rates negatively impacted demand, but that didn’t crash the market. In 2014, requisition data was down 15-20% for most of the year, year over year, ending at an all-time low when adjusted for population growth.
The rule of thumb for mortgage rates has always been for me when the 10 year goes above 2.62% you should start to expect demand to slow down. While a 10-year rate above 2.62% can still translate to a historically low mortgage rate, history tells us it will push the “marginal buyer” out of the market and cool the entire industry.
In 2018, higher rates affected demand for new home sales to such an extent that inventories exceeded 6.5 months of supply – effectively halting the rate of construction growth in 2019. Along and short is that when economic growth picks up and gives way. increase, this can have an adverse effect on the housing market.
In my Prediction Article 2020, I said the bond market needs to close above 1.94% and have follow-on sales in order to prove that the markets have confidence in a story of economic growth for 2020. This has never happened in 2019 after we got the yield curve inverted, or 2020. Then the virus hit us, knocking the 10-year yield down to a low of 0.33% on March 9.
Since then, we have recovered and for now everything is fine as mortgage rates have hit an all-time low this year. However, going forward, I would recommend keeping an eye on housing demand if 10-year rates go above 1.94%.
This will be the first test of how the housing market reacts to higher mortgage rates. If we see these returns and don’t get a drop in demand, especially in new home sales, that will be a tremendous affirmation of the strength of the housing market. But I’ll need to see it to believe it.
To reiterate my main takeaways, remember that higher mortgage rates matter. Even though 4.5% -5% are comparatively low mortgage rates, they do have an impact on demand. Builders are sensitive to this and will react by stopping the pace of construction growth if the monthly supply exceeds 6.5 months.
The rise in bond yields that led to higher mortgage rates never brought home prices down, but it cooled prices. In fact, in 2019, real house prices turned negative year over year, which I still applaud today as a healthy housing event.
The housing is sticky and the tenancy of the housing is now 10 years. In 2018 and 2019, we had a great dance in the housing market – sales were going down, but not by much and inventories were going up year over year, but not by much. This has cooled the rate of growth in house prices, with prices remaining relatively stable.
A stable housing market isn’t sexy, but it’s the right kind of market to have.