Low Mortgage Rates Hasn’t Been Catalyst for Home Building, Mortgages

Despite the lowest interest rates in three years and a resulting uptick in refinancing–the Mortgage Bankers Association last week reported refinance application activity was 180 percent higher than a year ago–several reports said the rate drop doesn’t appear to be having the desired effect on housing activity.

Fitch Ratings, New York, said lower mortgage rates are not expected to meaningfully spur U.S. housing market activity as seen in prior rate cycles. Its report said affordability issues driven by price appreciation continue to constrain the housing market, with rising input costs for home builders further exacerbated by tariff considerations.

And in a letter to clients, Goldman Sachs, New York, said home builders face three headwinds that are hampering growth: tax reform, which effectively increased the cost of homeownership; the construction labor market, which continues to be “very tight;” and regulatory costs that have hit home builders’ bottom line.

New home construction has been inconsistent for more than a year; in July, HUD and the Census Bureau reported housing starts at 1.191 million, seasonally annually adjusted, a mere 0.6 percent higher than a year ago. Permits have shown similar inconsistencies. Meanwhile, HUD/Census last week reported July new home sales fell by nearly 13 percent from June to 635,000 units, seasonally annually adjusted, although they improved by 4.3 percent from a year ago.

The NAHB/Wells Fargo Housing Market Index has remained positive over the past year, but with little movement. NAHB Chief Economist Robert Dietz noted lower mortgage interest rates have sparked recent improvement in builder confidence, but “we have not seen an equivalent higher pace of building activity because the rate declines occurred due to economic uncertainty stemming largely from growing trade concerns. Although affordability headwinds remain a challenge, demand is good and growing at lower price points and for smaller homes.”

The MBA Weekly Applications Survey for the week ending Aug. 16 noted while refinancings increased by 0.4 percent from the previous week, with the refinance share hitting nearly 63 percent of applications, the overall index fell by 0.9 percent, as the Purchase Index fell by 4 percent from a week earlier.

Despite headwinds, Fitch sounded a somewhat optimistic outlook for home building. “The low-rate environment should continue to stabilize the market after a sluggish 2H18 and 1Q19, with momentum expected to continue in 2H19,” it report said. Fitch projects housing starts to improve by 1 percent in 2019, with new home sales expected to grow by more than 2 percent, while existing home sales are expected to decline modestly, constrained by a lack of inventory, particularly at the entry level.

“Builders have responded to the inventory shortfall by building more affordable homes to meet demand, which would also put downward pressure on prices due to mix shift,” Fitch said.

However, the Goldman Sachs outlook cited tax reform, labor shortages and regulatory costs as persistent headwinds that could hamper home building in the coming 12 months. Chief Economist Jan Hatzius noted the Tax Cuts and Jobs Act, which took effect in early 2018, “reduced the cap on principal for interest deductions on new mortgages from $1 million to $750,000, added a cap of $10,000 on state and local property and income tax deductions and doubled the standard deduction, reducing the value of owner-occupied housing as a tax shield.”

Goldman Sachs said the inability to attract labor has also hampered home builders. “Construction in particular has struggled with slower growth of immigrant labor and falling interest in the industry among younger generations despite its increase in wages relative to manufacturing pay,” it said. Additionally, rising costs of land and red tape in acquiring permits have climbed, “with many municipalities requiring developers to contribute more to funding for public amenities.”

And, conversely for home builders, the low mortgage interest rate environment is also providing existing homeowners and incentive to stay where they are. “Lower interest rates are also having an impact on refinancing activity, suggesting that an additional modest boost via consumption channels is already materializing,” Goldman Sachs said.

Meanwhile, MBA sounded a positive note. Earlier this month the MBA Builder Applications Survey for July showed mortgage applications for new home purchases increased by 11 percent from June and by 31.2 percent from a year ago. MBA estimated new single-family home sales were at a seasonally adjusted annual rate of 754,000 units in July, based on data from the BAS, an increase of 16.7 percent from the June pace of 646,000 units. On an unadjusted basis, MBA estimated 63,000 new home sales in July, an increase of 8.6 percent from 58,000 new home sales in June.