Slow, But Steady

Thanks to the long Labor Day weekend, the flow of housing and mortgage news was reduced to a trickle this week. That said, there were still a few news items worthy of mention.

Mortgage rates were one such item. They continued to ease this week, with the 30-year fixed-rate mortgage down roughly 10 basis points. This marked the second-consecutive week of noticeably lower rates, which, in turn, stimulated refinance activity.

It's no secret that refinances have plummeted this summer on rising interest rates. Should rates hold steady or continue to ease (no sure thing), we'd expect refinances to gain further ground. Our optimism is based on rising home-equity values, which are pulling more mortgage-indebted owners above water, thus enabling them to refinance their higher-rate loans.

Mortgage rates have easily dominated financial headlines over the past few months. Many market watchers have wondered aloud if rising rates will slowdown, if not derail, the housing recovery? (We wonder if we should still be calling it a recovery at this point?)

To be sure, there is reason for concern: Real estate firm Redfin reported in its Real-Time Homebuyer Survey that 63% of its respondents say rising rates are making it more difficult to buy a home.

We don't doubt that's true. But we think the main issue is still sluggish economic growth. We've frequently mentioned that rising interest rates wouldn't necessarily be bad if accompanied with higher economic growth (and job growth, in particular). If we go back a decade ago – when lending rates were 150-to-200 basis points higher than they are today – buying and financing activity was brisk. Not coincidentally, economic growth was also brisk.

Unfortunately, today we've got higher interest rates and economic growth still hasn't fully kicked in. This is another reason we remain unconvinced that Federal Reserve tapering of Treasury notes and bonds and mortgage-backed securities is imminent. Our skepticism suggests to us that mortgage rates are unlikely to move materially higher in the near term.

Another topic we've frequently hashed over is market composition. Specifically, the need for the housing market to be driven more by owner-occupied buyers instead of investor/landlords.

We have nothing against investors or landlords, but a normalized healthy housing market is driven by the owner-occupied buyer. We say that because communities composed mostly of owner-occupied buyers tend to be more stable and better maintained than communities of renters.

A new research paper from the University of North Carolina at Chapel Hill underscores our contention. In particular, the paper focuses on the adverse effects of “renter's disconnect,” which includes less property upkeep, fewer property improvements, and more aloofness with neighbors. None of these are conducive to rising property values.

The good news is we're seeing a return to a more normalized market: Despite talk of the United States becoming a nation of renters, surveys from Fannie Mae, Freddie Mac, and other sources point to a populace that overwhelming wants to own. That's good news that ensures housing will remain an important economic driver for years to come.

Courtesy of Jessica Regan.

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