According to a recent report by Zillow Inc., home values in the second quarter of this year increased at the highest rate since 2005.
In the month of June, construction for new homes rose at the fastest pace in nearly four years.
Housing starts jumped 6.9 percent to an annual rate of 760,000. The numbers for May were also revised up to 711,000.
The West was the strongest region, showing a 36.9 percent jump, followed by a 22.2 percent increase in new construction for the Northeast.
Nearly every single metric shows housing to be cheap. What is the reason?
The 10-year Treasury bond is yielding a record-low rate of approximately 1.4 percent. As the 10-year Treasury bond has dropped in price, mortgages have become cheaper.
The reason for the correlation is that banks can choose whom to lend to. Why lend to someone who might default when they can lend risk free to the government? Therefore, mortgage rates are always higher than Treasury yields. However, as Treasury yields drop, so do mortgage rates.
Mortgage rates are now at a record low. According to Zillow, the 30-year fixed mortgage rate on Zillow Mortgage Marketplace is currently 3.41 percent. This is an extremely attractive rate for homebuyers, even compared with a year ago, when rates were closer to 5 percent.
Another factor driving housing values is increasing rental prices. As rent prices rise, people are more inclined to consider buying a home.
Many are calling a bottom in housing.
“Demand has bottomed out, and we expect continued improvement,” says Yelena Shulyatyeva, an economist at BNP Paribas. “We’re in a recovery, a very slow one.”
Housing is vital to the recovery. Warren Buffett stated that the two important factors for an economic recovery are housing and employment.
Housing is also the most important asset to most Americans. As housing prices increase, so does the wealth of homeowners.
Additionally, it makes economic mobility easier. Most people do not want to move if their homes are underwater. If homeowners can sell at a premium, they are more likely to take new jobs or start up a business elsewhere in the country.
It is a bit shocking to see these housing numbers, despite the sluggish economy. Although housing numbers are strong overall, almost every other economic indicator is weak. The biggest reason for the strong numbers is likely the low interest rates.
However, nothing lasts forever. Many people have been calling a bottom in housing for years. The economy in Europe is getting worse, and China is slowing. Even with the lowest interest rates ever, housing will not continue its boom unless the economy starts to show signs of life in other areas.
Investors, homeowners and observers should keep in mind that either a bad economy will bring down housing or the economy will need to improve before we can finally call a real bottom.
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