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Housing needs time to recover. Interest rates won't help.

The housing market matters, if for no other reason than it's the primary source of U.S. household wealth, regardless of income or status.

The rate of Americans participating in the stock market, while down from the peak levels recorded before the Global Financial Crisis in 2008, is holding steady at around 61%, according to recent Gallup data.

However, while nearly 8 in 10 wealthy Americans actively buy shares, that number falls to around 2 in 10 for those earning less than $40,000 a year.

Census Bureau data, however, suggest American homeownership rates of around 66%. While richer families have a higher chance of owning their home outright, the rate of ownership for those earning around $40,000 a year is just under 60%, according to a study from Barclays.

The value of housing is far higher (at $52 trillion, according to a late 2023 report from Zillow) than the stock market, which was hovering around $41.92 trillion on Friday.

That might explain why so many Americans feel unconfident about the state of the economy, even as stocks hit new record highs, companies continue to hire more workers, and inflation continues to slow.

A recent CNN poll noted that 48% of those surveyed said the economy "remains in a downturn" despite a fourth-quarter GDP growth rate of 3.3% and a current quarter clip of 2.9%.

If it's not happening in housing, it seems, Americans aren't feeling it.

And that's not likely to change anytime soon.

The U.S. housing market is worth around $52 trillion, $10 trillion more than the entire value of the S&P 500. <p>Shutterstock</p>
The U.S. housing market is worth around $52 trillion, $10 trillion more than the entire value of the S&P 500.

Shutterstock

It's all about interest rates

Mortgage rates remain the principal driver of housing market activity, either in terms of outright purchases or the levels of investment homebuilders are willing to commit to breaking ground for new construction.

Treasury bond yields, in turn, also play a crucial role in the housing market, setting the tone for home affordability and refinancing demand.

Bond prices, which move in the opposite direction of Treasury yields, have been falling sharply for much of the past two weeks and accelerated further over the past four days, following higher-than-expected readings for both consumer price and factory gate inflation in January.

The 10-year Treasury note yield, tightly linked to benchmark 30-year mortgage rates, has risen more than 44 basis points this year, which could add as much as half a percent to home borrowing costs over the near term.

Related: Inflation delivers knockout blow in stocks’ ‘Fight the Fed’ battle

Last week, the Mortgage Bankers Association said the average 30-year fixed rate jumped seven basis points to 6.8%, the highest since early December. That gain was before the seven-day period prior to January's sticky inflation reports.

A move in mortgage rates north of 7% over the coming weeks is likely, acting as a "further reminder that the recovery will be bumpy as buyers remain sensitive to interest rate and construction cost changes," according to Robert Dietz, chief economist for the National Association of Homebuilders, or NAHB.

Prior to the spike in Treasury yields, homebuilder confidence was ticking higher, rising to levels last seen in August. NAHB Chairman Alicia Huey noted that members believe "even small declines in interest rates will produce a disproportionate positive response among likely home purchasers."

Housing starts stop

That wasn't entirely evident in the January figures for housing starts. They showed a 14.8% decline from December to a run rate of 1.33 million units. Building permits, a good indicator of demand, were down 1.5% to 1.47 million units.

Single-family home construction, where demand is mostly tied to mortgage rates, fell 4.7%, while multi-family construction, more closely linked to rent prospects, plunged 35.6%.

Bill Adams, chief economist for Comerica Bank in Dallas, thinks the downturn is likely weather-related, noting wisely that the fall in permits was much less than the overall rate of new buildings.

"It’s easier to file paperwork in a snowstorm than to break ground on a new home," he said. "Housing activity, like consumer spending and mining output, should pick up in February and March as the weather becomes less of a factor."

That view is shared by Ian Shepherdson of Pantheon Macroeconomics, who notes the uneven elements in early-year housing data cloud the "gentle upward trend" in single-family construction.

"The monthly housing starts numbers are extremely noisy and prone to revisions, but the bigger picture is that single-family starts are trending higher, lagging the drop in mortgage rates towards the end of last year, while multi-family starts are trending lower, lagging the rollover in rent inflation," Shepherdson wrote.

But any housing sector pickup will also need support from the bond market. Unfortunately, it's spooked by the surprise uptick in inflation pressures and a Federal Reserve pushing back hard against expectations of a spring rate cut.

More Real Estate:

Fed Chairman Jerome Powell stressed that he and his colleagues do not include housing market activity in their rate-setting objectives, even as lawmakers continue to write letters urging it to make housing more affordable.

Related: Fed members just hat-tipped what's next for interest rates

"We’re not targeting housing price inflation, the cost of housing, or any of those things," Powell told reporters in late January. "Those are very important things for people’s lives, but they’re not the things we’re targeting."

Fed targets inflation, not homebuying

Comments late last week from Atlanta Fed President Raphael Bostic also reminded investors that market forecasts for near-term rate cuts are still not aligned with the central bank's.

“My expectation is that the rate of inflation will continue to decline, but more slowly than the pace implied by where the markets signal monetary policy should be,” Bostic told an event in New York, adding he is "not yet comfortable that inflation is inexorably declining to our 2% objective."

Rate traders, who put the odds of a March rate cut at 63.1% just a month ago, have lopped those odds down to just 10.5%, according to the CME Group's FedWatch tool.

The best odds for the first rate cut of the year are no better than a coin toss in June, with new projections from the Fed due in March that could push those bets further into the summer and possibly beyond.

“The economy has been performing well so far this year, and rates may stay higher for longer, potentially slowing the spring homebuying season," Freddie Mac's chief economist, Sam Khater, said last week.

Related: Veteran fund manager picks favorite stocks for 2024

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