Joel Naroff to Moneynews: Higher Mortgage Rates Have Yet to Hit Housing Market

Wednesday, 17 Jul 2013 01:34 PM

By Newsmax Wires

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U.S. builders started work on fewer homes in June, mostly because apartment construction fell sharply.

But many economists fear that surging mortgage rates could help to stall the housing recovery in the future.

“The housing market is already beginning to slow and the impact of the higher rates has barely been felt, which is not good news for the economy,” said Joel Naroff, president of Naroff Economic Advisors and a member of Newsmax's Financial Braintrust Alliance (FBA).

Watch our exclusive video with Joel Naroff. Story continues below.



Editor's Note: Know the story behind the numbers: Forecaster Joel Naroff provides timely, expert analysis of key economic data for Financial Braintrust Alliance members.Visit www.fbtalliance.com for more information and to sign up.

Developers began construction at a seasonally adjusted annual rate of 836,000 homes in June, the Commerce Department said Wednesday. That was nearly 10 percent below May's total of 928,000, which was revised higher, and was the fewest since August 2012. Most of the drop occurred in apartments, where starts fell almost 27 percent in June from May. Apartment construction is volatile from month-to-month.

June’s dip in housing starts “may not have been just a temporary blip,” Naroff told Newsmax TV in an exclusive interview.

“Housing and vehicles have been the two key sectors in the economy keeping growth going. With mortgage rates jumping, the question has been whether the strength in sales and critically construction could continue,” Naroff wrote in an analysis.

“If you look at the June numbers, the prospects are not that great. Housing starts plummeted, though most of the decline was in multi-family activity,” he wrote.

“We have to be cautious in jumping to any conclusions about building activity going forward especially given the terribly wet weather in June that could have slowed things down.”

Meanwhile, applications for permits to build single-family homes rose for the third straight month to 624,000, the highest since May 2008. That suggests home construction should rebound in the coming months. Overall permits fell to 911,000 in June from 985,000 in May, which was also revised higher.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

Despite June's decline, builders started work on 10 percent more homes last month compared with a year earlier. And permits are 16 percent higher than a year ago.

The uptick in permits for single-family home construction echoed a report Tuesday that showed confidence among homebuilders rose in June to its highest level since January 2006.

The housing recovery has been providing critical support to the economy at a time when manufacturing and business investment have stagnated.

One concern is that mortgage rates have started to rise from their record lows and could spike further if the Federal Reserve slows its stimulus. Average rates on a 30-year mortgage rose to 4.5 percent last week, the highest in two years, according to mortgage buyer Freddie Mac.

The Fed has been buying $85 billion a month in mortgage and long-term Treasury bonds to try to reduce long-term interest rates and encourage people and businesses to borrow and spend. Chairman Ben Bernanke said last month that the Fed could begin to reduce its bond buying later this year if the economy continues to strength.

But Bernanke said in prepared testimony Wednesday that the Fed's timetable for reducing its bond purchases is not on a "preset course" and will depend on how the economy performs.

Higher mortgage rates could slow the housing rebound, although most economists aren't yet concerned. They note that other factors are more important to the recovery, such as steady job gains, economic growth, and an increasing willingness among banks to lend.

“The Fed traditionally has the greatest impact on the interest sensitive sectors such as housing and motor vehicles,” he wrote.

“Why would the Fed risk the recovery that is going on those sectors while growth remains tepid as best? I just don’t know.”

“The housing starts numbers raises questions about second quarter growth,” he wrote.

“We are also seeing sequestration kicking in further, the trade deficit looks like it is widening and it is unclear how strong business investment will be. The only part of the economy that remains unambiguously strong is motor vehicles,” he wrote.

“We get the first estimate of second quarter GDP two weeks from today and I am getting worried about it,” he wrote.

“I have been at 2 percent plus or minus but now I would not be surprised if it is closer to or even below 1.5 percent. That would come on top of 1.8 percent growth rate posted in the first quarter. Two consecutive quarters of below 2 percent growth, coupled with inflation running closer to 1 percent than 2 percent (the Fed’s target), do not argue for tapering quantitative easing.”

Meanwhile, the recent increase in rates could be encouraging many potential buyers to step up their efforts to find a home to purchase.

Steady job growth and low mortgage rates in the past year have fueled more home sales. The increased demand, along with a tight supply of homes for sale, has pushed home prices higher. That's encouraged builders to start more homes and create more construction jobs.

Rising home prices also tend to make homeowners feel wealthier and more likely to spend. That drives more growth because consumers' spending accounts for roughly 70 percent of economic activity.

Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to statistics from the National Association of Home Builders.

The Associated Press contributed to this report.

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