Will housing withstand higher mortgage rates?

Last week began with a reverse-bang: the previous Friday’s payroll report was distinctly weak, and rates fell a lot that day, but on Monday morning last week markets immediately un-did themselves. Right back to where they were — mortgages in the high threes, the 10-year T-note just under 2.00%.

That trading is a clear sign that the bond market is gradually awakening from denial. The Fed is coming. Two if by land, one if by sea, but either way, they’re coming.

Fed minutes from last week

Last week the Fed released minutes of its March 17-18 meeting, which were widely described as “divided.” No, they’re not. The control group — Chair Yellen and the governors appointed by the president and confirmed by Congress, joined by the capable regional Fed presidents (Dudley, Williams, Rosengren, Evans, Lockhart) — is in complete agreement: the Fed will lift of from 0% this year unless the economy swoons. Most likely in summer, and at a very low slope. And without further warning. The warmer the economy looks, the sooner; if a tad cool, early fall.

The other chatter out of the Fed comes entirely from the other regional Fed presidents, who seem unaware and uninterested that their hawkish world view is out of touch. Nevertheless, the bond market is a big place, and a lot of it has become convinced that the Fed will stay at 0% forever. Uh-uh.

Is housing strong enough to withstand higher mortgage rates?

The part of the economy most vulnerable to liftoff is of course… us. Housing.

It is possible that the extraordinary bond-buying quantitative easing (QE) by foreign central banks will hold down U.S. long-term rates even as the Fed raises the overnight cost of money.

Very low inflation and oil prices may have the same effect. But we have to address the central question: is housing strong enough to withstand higher mortgage rates?

The question is a big deal — last year despite all contrary forecasts, mortgage rates fell back into the threes, and housing still did not ignite. Just stumbling forward, under performing nearly all forecasts.

But now, this spring, there are flickers of improving health. Little up-ticks in purchase mortgage applications. What does real health look like, and why? I live in the hottest housing market in the U.S., Denver Metro.

Why us, and not elsewhere?

1. Our home prices stayed flat from 2001 until ignition in January 2013. We had no bubble. We had a mini-bubble 1998-2000, when the IT Fairy landed here, but when she left… flat. We had our foreclosure episode, plowing through consequences of idiotic subprime lending, but no bust, just flat. Flat is good, and long flat is ideal. During twelve years of flat prices, purchasing power accumulated — even with wages growing at two, or three, or four percent, that’s a lot of accumulated power.
2. From 2000 to 2015 the state population grew by one million people, a 25% increase, most of them within commuting range of Denver. While prices were flat. And because of accumulated development, and our local mania for open space preservation (in CO outside a municipality, the minimum lot size is 35 acres by state law), as big as CO is we are short of land. Near Denver, very short. Near Boulder we can see the last single-family building sites ever. Our economy is diversified, heavy with stable government payrolls, IT, bio-T, and entrepreneurial.

Purchasing power meets scarcity, and ka-BOOM. Prices in 2013 and 2014 rose in an annual range of 5%-8% depending on the usual things. I had thought that mortgage hyper-regulation and appraisal lids would hold appreciation in the 8% range despite our explosive demand/supply mismatch. Uh-uh.

An attractive new listing this year will be sold in the listing office before it hits the market. Good ones which make it to market may have 40 showings in the first 48 hours. Offers commonly waive appraisal and commit to making up in cash any gap between appraisal and price. A new bubble? Nope — the economic foundation is sound.

A few other places are like us, but most are not. Most have neither the scarcity, the long-flat, nor the income growth. The Fed knows housing is still fragile, but…
They are coming.

Five years of 10-year T-note. We are very close to the all-time 2012-2013 bottom, the heart of QE3, but now the Fed is going to lift off. We CAN still go lower, but it will take some really lousy news to do it.

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