Low Mortgage Rates Not Enough to Spark Housing Boom
Interest rates are near all time lows yet the national housing market is still experiencing stagnation & property value declines. Why is that? This article aims to educate
via The Wall Street Journal
Cheap Mortgages Aren’t Enough to Spark Housing Boom
Mortgage rates have rarely been so low, yet the housing market remains subdued
Lower interest rates were supposed to breathe new life into the housing market. But so far there are few signs of a real-estate revival.
Thanks in large part to the Federal Reserve’s dovish turn this year, mortgages have rarely been so cheap. As of last week, the average rate on a 30-year fixed was 3.75%, according to Freddie Mac, down from 4.73% a year earlier. Throw in an unemployment rate at nearly a 50-year low and improving household balance sheets and it seems like the housing market should have plenty of fuel.
But housing doesn’t look so hot. The latest evidence of that came Wednesday as the Commerce Department reported that construction was started on an annualized 1.25 million new homes last month, fewer than the 1.27 million economists expected.
Single-family housing starts, which better capture the trend in construction than the volatile overall figure, came to an annualized 847,000, which was down 1% from a year earlier. Residential building permits, a measure of the pipeline for new construction, also came in below expectations. Recent home-sales figures also have been on the weak side. Late last month, shares of Lennar , the country’s second-largest home builder, fell sharply after it gave a disappointing outlook on new home orders.
There are a variety of forces that might be muting the effect of lower mortgage rates on the housing market. Would-be buyers have to qualify for a mortgage before they get one, for example, and lending standards remain far more stringent than they were before the financial crisis. Nor do Americans view homes as such a good investment as they used to.
Then there is the issue of affordability: Home-price gains have moderated, but as of May prices were still up 3.6% from a year earlier, according to CoreLogic, outpacing the 3.1% in average increase in hourly earnings over the same period. Moreover, the 2017 tax overhaul effectively raised the costs of homeownership for many buyers, particularly in high-tax states.
Perhaps it is just a matter of time before lower rates start to work their magic. But given the overall backdrop—low rates, strong hiring, soaring stock prices—it seems as if the housing market ought to be doing a whole lot better than it is already. One or two Fed rate cuts are unlikely to make a big difference. This might be about as good as it gets.