Housing Still On Track for a Strong 2015

Home builders are as optimistic as they've been for nearly a decade. The National Association of Home Builders/Wells Fargo Housing Market Index rose a point this month to register at 61. This is the highest reading since November 2005.  

Sentiment is usually driven by activity. The good news is that activity remains strong. Housing starts rose 0.2% to an annual rate of 1.21 million homes in July. Nearly all the gains were recorded in the important single-family component, which shot up 12.8% to 782,000 homes. 

To be sure, existing-home sales produce the lion's share of transaction activity, but new-home sales and new-home construction contribute much more to overall economic activity. Residential investment has historically averaged roughly 5% of gross domestic product, according to NAHB data. That we continue to see strong home-builder activity bodes well for the overall economy.

The good news is that it continues to climb toward the important 1.5 million annual average. Historically 1.5 million has been the marker that lets you know the economy is hitting its stride. 

With that said, is the sword of Damocles about to break free and end the good times? 

We again refer to the Federal Reserve and interest rates. We've mentioned many times how fickle markets are, and credit markets are as fickle as any. After China devalued its currency last week, many market participants changed their bets: They bet the Fed wouldn't raise the federal funds rate next month. Now, it appears that many bets were placed in haste. The federal funds futures market now shows that traders are pricing futures contracts for a 45% chance the Fed will raise the federal funds rate next month. 

Mortgage rates have been less fickle than most, having trended lower in the past month. The 30-year fixed-rate loan priced below 4% has again become the new norm.  An increase in the federal funds rate could easily change that, though, with above-4% supplanting sub-4%. 

Since the beginning of the year, we've been skeptical of impending Fed action on interest rates. Nevertheless, pressure is mounting on the Fed to do something. But as the Fed itself has said, any decision will be “data” dependent. The employment situation for August could be the datum that tilts the scales. If job growth comes in strong – 250,000 or higher – for August, the Fed could well decide to raise the federal funds rate.  Below that, and it's anyone's guess.

We wouldn't be surprised either way, and either way we still see strong home sales and construction activity through the remainder of the year. As for mortgage rates, we still think current rates are about good as it's going to get.    

Information provided by Jessica Regan.

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