Sentiment Up, Starts Flat, Rates Fall

Home builders remain upbeat. The National Association of Home Builders Sentiment Index posted at 57 for December. This is a point lower than the 58 reading posted in November, but is still the sixth-consecutive reading above 50. (A posting above 50 indicates more optimism and less pessimism.)

Home builders appear to be viewing the market farther afield. For the here and now, the data are not particularly encouraging. Housing starts posted at 1.028 million units on an annualized rate for November. This is in line with expectations, but the pace of starts is off 7% compared to this time last year.

Strength in starts was found in the volatile multi-family component, which was up 6.7%. Unfortunately, the more-important single-family component was down 5.4%. Looking to the future, housing permits were down 5.2%.

In recent months, housing numbers have oscillated perceptibly. October was relatively good but November was not. When we take a longer-term perspective – over the past six months – we see housing growth that has been flat to moderately positive.

Given where mortgage rates have trended lately, we could see housing activity begin to trend more positively. Rates have been dropping for the past six weeks, and are now down to levels last seen 18 months. Bankrate's survey, which tends to lean toward the high side, showed the 30-year fixed-rate mortgage averaged 3.94% over the past week. Freddie Mac's survey showed the 30-year loan averaged 3.8%.

Moreover, it doesn't appear rates will be heading for higher ground in the near future. In the minutes from the latest meeting of Federal Reserve governors, Chair Janet Yellen indicated that language switch to "patience" from "considerable time" on the federal funds rates does not indicate a change in Fed policy.

In other words, the Fed has no intentions to raise interest rates in the near future. Many market watchers don't think anything will change on the rate front until the second half of 2015. Inflation remains low, and is unlikely to move higher given the drop in energy prices. And despite a strengthening economy, there are still enough lagging sectors to keep rates low.

Our New Year's predictions on home prices, the economy, and job growth have turned out as we expected. As for mortgage rates, we were off base. This time last year we were expecting 5% on the 30-year loan by this time. As things stand now, we see nothing to move rates higher any time soon.

Information provided by Jessica Regan.

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