Fed PolicyMortgage

A look at housing without rose-colored glasses

Let's look at the Fed rate

It is only Jan. 6 and already reports are appearing that 2016 is going to be a wonderful year for housing. Don’t believe everything you read.

For example, in an article in HousingWire, “Proof the housing market can survive a Fed interest rate hike,” the author, Brena Swanson, quotes Mathew Pointon, property economist with Capital Economics, as saying that the precipitous drop in mortgage applications this week (by nearly 28%) is not due to the Fed raising interest rates.

Instead, Pointon says that the data really shows that while refinancing mortgage loan applications dropped significantly, purchase applications were actually up.

Nice spin, and perhaps true to a point, but a rise in mortgage interest rates will have a negative impact on mortgage purchase applications – and soon.

The Fed has already signaled that it will continue to raise rates this year and perhaps beyond, albeit in tiny increments. Mortgage rates will follow, just as they have following the Fed’s move last December. They may remain near historical lows, but will rise nonetheless.

With each uptick in mortgage interest rates, numerous potential buyers will find themselves unable to qualify for a loan.

While I wish I owned the same kind of rose-colored glasses that those who are spinning this kind of information wear, I do not. Nor would I wear them or hide behind them if I did. And, although “data” may suggest otherwise, things are not looking up for our economy or the housing sector, as evidenced by the dramatic drop on Jan. 4 and Jan. 6 of our stock market.

Most everyone is aware that data can be manipulated to paint whatever picture one wants it to.

A case in point, as also reported in HousingWire by Swanson, private sector employment grew by 257,000 jobs from November to December in 2015, according to the December ADP National Employment Report.

To some, apparently, this is a remarkable sign that the job market is finally gaining strength. But in truth, the correlation between increased jobs in November and December, and the hiring of temporary seasonal workers is irrefutable. Far from remarkable, it is an annual occurrence.

In Swanson’s article she quotes Ahu Yildirmaz, vice president and head of the ADP Research Institute, as saying, "2015 had a strong close with December showing the largest job gains of the year.”

What a surprise! 

But there is more. Yildermaz was also quoted as saying, “Overall, the average monthly employment growth was just under 200,000 for the year in contrast to almost 240,000 jobs per month in 2014. Weakness in the energy and manufacturing sectors was mostly responsible for the drop off.”

While one might desire to point to December’s jobs numbers as a positive sign as we move into 2016 relative to potential job growth, it is a stretch to believe the latest numbers equate to a trend. Time will tell.

More importantly to focus on early this year, because of rising interest rates, insane housing rental payment vs. income ratios of between 50-60% in some areas, potentially weak improvement in meaningful job growth, a declining stock market, global calamity, and weak leadership across our federal government, consumer confidence will be, without doubt, negatively impacted.

Certainly, purchase mortgage applications, along with refinancing mortgage applications will decline.

Because of all this and more, not everyone is predicting a smooth road ahead, of course, as there are growing concerns by many economists and others that we are headed for another recession, even as we never truly climbed out of the last one.

Until there is a dramatic change in the direction of this country with respect to national security, our world-leadership role, monetary and taxation policies, coupled with the reasonable regulation of, and respect for, private-sector businesses (especially small businesses, which are the economic backbone of America), our economy in general and the housing sector in particular will not, cannot improve – no matter who tries to spin it otherwise. 

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