An Important Economic Driver Is Sputtering

Residential investment is a meaningful contributor to gross domestic product (GDP). The National Association of Home Builders estimates residential investment contributes 5% annually to GDP. That's roughly $85 billion.

Unfortunately, housing's contribution to GDP has waned in recent months, at least when focusing on investments in starts. January's data show that starts posted at 1.099 million on an annualized rate. This is a 3.8% reduction from December's tally, and a disappointment compared to the 1.185 million most economists were expecting.

The start rate has been declining for the past three months. It's unlikely we'll see much of pick-up in the near future. Permits for single-family homes increased an anemic 1.6%. Multi-family permits rose 2.1%. (Of course, multi-family includes a lot of apartment rental construction, which doesn't do much for sales and mortgage lending activity.)

Builder optimism, not surprisingly, correlates with starts. The NAHB home builder sentiment index dropped three points to 58 this month. This is the lowest reading since May 2015. The good news is that optimism continues to outrun pessimism. (A reading below 50 would mean pessimism is the predominate sentiment.) Demand really isn't the issue; creating supply is. Builders cite a dearth of qualified labor and available lots for the slowdown.

Last week, we mentioned that we expected to see a pick up in lending activity when the Mortgage Bankers Association reported numbers for that week. On that front, refinances continue to roll in.  They were up 16% week over week. Unfortunately, purchase activity disappointed. Purchase applications were down 4%.

We weren't terribly surprised to see a drop in purchase activity. Though mortgage rates were near a one-year low, other variables weighed on the market. Global financial markets remain in distress, as they have been for most of this year.  Our own stock market has had a rough February. We can't overlook commodities; oil hit a 14-year low last week.

The good news is that the mood in the financial markets has improved over the past week. Stocks have rallied. Commodity prices, oil in particular, have moved higher. This points to a more optimistic outlook for global growth.

Of course, when optimism rises, so do lending rates. We've seen the yield on the 10-year U.S. Treasury note rise nearly 15 basis points this week. Mortgage rates have trended higher. This isn't a negative, though. Rising rates are tethered to rising financial-market expectations and rising consumer confidence.

We've been saying for the past month that an improved economic outlook outweighs low mortgage lending rates in sustaining housing. We still believe that's the case. We believe that there's no reason to fear a rising-rate environment, if we are entering one. Rising rates point to more positives than negatives.

Information provided by Jessica Regan.

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