Impact of the Fed taper: The Treasury International Capital report (Part 5 of 8)
Housing starts and building permits data for the month of January were issued by the U.S. Department of Commerce on Wednesday, February 19. The weekly change in the Mortgage Bankers Association Purchase Application Index was also released on Wednesday. Housing indicators are extremely important in gauging consumer confidence. Purchasing a residential home is a very large investment and an increase in housing indicators will suggest the confidence in the overall economy. Also, since consumption comprises over 70% of the economy, an improvement in these indicators will imply that the overall economy is improving.
The U.S. Department of Commerce released housing starts and building permit figures for the month of January 2014 on Wednesday, February 19. Privately owned housing starts came in at a seasonally adjusted annual rate (or SAAR) of 880,000 for the month of January 2014, down 16% month-on-month, and down 2% compared to January 2013. The slump was attributed to the unusually cold weather which acted as a dampener for construction activity.
Privately-owned housing units authorized by building permits in January were at a seasonally adjusted annual rate of 937,000, down 5.4% from December’s revised rate of 991,000, but up 2.4% year-on-year. Building permits data is relatively unaffected by weather conditions. The year-on-year increase in building permits is a positive indicator for housing activity as it implies that more people are planning residential construction.
What is the Mortgage Bankers Association’s Purchase Applications Index?
The Mortgage Bankers Association’s Purchase Applications Index is a weekly measurement of home loan applications which bases its results on a sample size of 75% of mortgage applications from around the country. A leading indicator of the housing market, it is reported as an increase or decrease from the previous week’s reading. An increase in index value signifies an increase in the demand for housing.
What did the latest reading indicate?
The Mortgage Bankers Association reported a seasonally adjusted 4.1% week-on-week decline in mortgage applications for the week ended February 14. The seasonally adjusted Purchase Applications Index declined 6% from last week and fell to its lowest since September 2011. The unadjusted Purchase Applications Index decreased 2% from last week and was down 17% compared to the same week a year ago.
A decrease in housing starts, building permits, and mortgage applications will imply that the economy is not recovering as expected and the Fed may slow down the pace of tapering in its monthly bond purchases. So far, the Fed has reduced its Open Market Purchases of long-term Treasuries and agency-backed securities by $10 billion per month, in both December and January, to $65 billion per month at present. If the Fed slows the pace of tapering bond purchases, other factors remaining constant, this will imply that interest rates will fall and bond prices will increase.
An increase in housing activity represented by increases in housing starts, building permits, and mortgage purchase applications will imply the consumer sentiment is improving and the economy is gaining traction. This means, other factors remaining constant, demand for housing, and so, mortgages, will push up mortgage rates. In this scenario it is also expected that the Fed will continue to implement its program of tapering bond purchases which will cause interest rates to rise and bond prices to fall.
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