Friday, November 10, 2006

Housing Market Bottomed - Already?

Mortgage rates and new home sales

In a recent post by Dr James Hamilton of the University of San Diego Econobrowser
he suggests that there is a 4-5 month lag between interest rates (both the Fed Funds rate and mortgage rates) and it's affect on a would be new home buyer's decision to purchase. He also notes a direct correlation to anticipated Fed Funds future rates and upcoming new home sales. Most importantly as we move into a period of quite likely, lower rates, housing should improve and he suggests we may have already bottomed out.

"I also noted in my previous post that the fact that the Fed has stopped raising the fed funds rate was a factor in bringing mortgage rates down since this summer. But because mortgage rates had previously been rising up through the beginning of July, the lags in the process mean that one would expect to see home sales falling relative to the usual seasonal pattern in August and September, even though the mortgage rate by then was coming down. Given the rate hikes in the spring and early summer and the long lags in the process, I calculate that recent changes in the mortgage borrowing rate have on balance been a factor causing home sales to be lower than they otherwise would have been up through the middle of October.It is only within the last few weeks that one would expect to see home sales stop falling as a result of the policy change that first began to be recognized this summer.

It was partly because of this calculation that I have been more open than many other analysts to the possibility that the
most recent data might be suggesting that the bottom for home sales may indeed have already been reached. However, even if sales now stabilize, the inventory of unsold homes will continue to put downward pressure on house prices and employment, either of which could easily become a new factor in the unfolding story. But what we can say is that one very important fundamental has now turned from negative to positive."

Posted by James Hamilton at November 8, 2006 05:25 AM


sippn said...

Downright interesting. I also read the backup data and looked further into Econbrowser to 11/26 article.

Charts re: New SFR sold show the supply bubble 2003-2005, but the next chart showing # months supply is also helpful. Current peak is nowhere near '91 '83 '81 '76. Been in the industry since '80. This isn't it.

The big public builders have been slapped enough to hold production down until this is corrected and then some. They'll have to put more risk factors and lower appreciation in their land purchase models.

Anonymous said...

The Case-Shiller housing futures have improved recently and are now projecting a 4.8% decline in the average home price over the next 7 months