Lower Mortgage Rates Unlikely to Boost the Housing Market

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Housing in the U.S. continues to lag the nation's overall economic expansion. Today's pending home sales report was quite disappointing (see chart), with month-over-month growth of 0.4% vs. the expectations of 1%. While the "post-winter" recovery has taken place across much of the U.S. economy (see chart), it remains absent in the housing sector. To be sure, apartment construction and rental business is doing quite well. The single family unit market however continues to struggle.

Mortgage rates have declined sharply recently, with the 30-year fixed rate approaching 4%. Jumbo rates are even lower. The question is whether this will provide some much needed relief to the housing sector.

[Listen to: Rick Sharga: Major Headwinds for Real Estate in 2014]

May mortgage rates
Source: Mortgage News Daily

The markets however are dismissing any significant benefits from these reduced mortgage rates. Here are a couple of indicators:

1. Shares of home-builders continue to underperform the broader market.

Homebuilders underperformance May
Blue = homebuilder index; orange = S&P500 (total return; source: Ycharts)

2. Moreover, lumber futures are touching fresh lows for the year, as markets point to expectations of persistent slack demand.

July lumber
July lumber futures (source: barchart)


The reasons for this skepticism remain the same. While credit conditions have eased for auto and credit card financing, they have tightened for mortgages (particularly nonstandard loans). Furthermore, many households remain uneasy about job stability and lack the confidence to buy — even when they qualify for a loan. Family formation rates are still subdued, especially in the under-30 age group. And the "rent generation" culture has been firmly in control.

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