Now that mortgage rates have come off their historic lows, commentators are beginning to proclaim that the end of the housing recovery is nigh. A recent headline from Yahoo’s Daily Ticker says it all: “Housing Bubble Deflated by Rising Rates.”
But like most things published on the Internet, the truth is much more nuanced. In this case, when you take all of the various data points into consideration, the weight of the evidence suggests that the housing recovery is still on track.
Why people are concerned about housing
There’s no question that mortgage rates are higher — and dramatically so. Since the beginning of May, the average rate on a 30-year fixed rate mortgage has shot up at an unprecedented pace, going from 3.35% all the way up to 4.51% today, according to Freddie Mac’s Primary Mortgage Market Survey.
There’s also no question that this has had a significant impact on the mortgage market. Data collected by the Mortgage Bankers Association reveals that application volumes have dropped by 53% over the same time period.
Beyond this, it’s similarly true that the fall in application volume is weighing on the nation’s largest banks. Wells Fargo & Co (NYSE:WFC), the biggest domestic mortgage originator by far, has said it’s laying off 2,300 employees from its mortgage department because of falling demand.
On top of this, the Commerce Department reported last week that new home sales fell in July by 12.4% on a seasonally adjusted annual basis compared to June. And just this week, the National Association of Realtors announced that pending sales of existing homes dropped on a sequential basis last month by 1.3%.
But do these things — which admittedly aren’t good news — portend an end to the housing recovery? Not necessarily.
Here’s the good news
While the data about mortgage volumes is certainly ominous, the concern still appears to be exaggerated — at least at this point. This is because the majority of the 53% decline in applications is related to refinance applications and not purchase-money applications — the latter have a direct impact on housing while the former do not.
Since the first week of May, applications to finance an existing mortgage are off by 63% while those secured to purchase a new home are down by a comparatively paltry 16%.
Now, to be clear, any decline in the latter isn’t a good sign. But the volume is still higher than it was last year, and more importantly, the most recent estimate of existing-home sales suggests it’s had little to no impact on actual sales.
There’s no getting around the fact that the construction and sale of new homes is important. But it’s nowhere near as important as the existing-home market.
In the month of July, for example, the Commerce Department estimated that roughly 400,000 new homes were sold on an adjusted annual basis. During the same month, meanwhile, the rate of existing-home sales equated to an annual rate of 5.39 million.
To drive this point home, check out the following graph, which certainly suggests the housing recovery is far from over.
How we’ll know if things stay on track
At this point, it remains to be seen what will happen to the recovery. Could it go off track? Certainly. But it hasn’t yet.
One of the things that investors should watch closely are the quarterly earnings releases of homebuilders, which, like the market overall, paint a conflicting picture of the industry.
On one side of the equation are builders like D.R. Horton, Inc. (NYSE:DHI) and Toll Brothers Inc (NYSE:TOL), which have recently notched dramatic improvements in net new contracts signed. In the most recent quarter, the former’s were up by 12% over the same quarter last year, while the latter’s improved by 26%.
On the other side of the equation are PulteGroup, Inc. (NYSE:PHM) and Beazer Homes USA, Inc. (NYSE:BZH), which saw their quarterly order volumes fall by 12% and 11%, respectively, causing both stocks to plummet after the results were announced.
The article Higher Mortgage Rates Haven’t Killed the Housing Recovery — Yet originally appeared on Fool.com and is written by John Maxfield.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo.
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