The Housing Market Isn't as Strong as You May Think

Interest rates and monetary policy are once again driving Wall Street this week.

Jul 9, 2014 at 1:00PM
Take The Long View

The Dow Jones Industrial Average (DJINDICES:^DJI) rebounded by 0.24% in Wednesday early afternoon trading following the triple-digit sell-off on Tuesday.

The talk on the Street this week has been in large part dominated by interest rates. More specifically, when are rates going to rise, and would that finally kill the bull market?

The conversation has rightly focused on the Federal Reserve's dual mandate of inflation control and optimizing the labor market. Both of those economic metrics have seen strong improvement over the past few months, with the unemployment rate now at 6.1% and inflation slowly creeping to the Fed's 2% target.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts.

The argument goes that because these two factors are both finally reaching a healthy level, the Fed will begin to raise interest rates and return to a more historically normal monetary policy. 

Rising interest rates are a headwind on growth as capital becomes more expensive, so the central bank must act delicately here to avoid sending the U.S. back into a recession. The higher rates should help keep inflation from getting out of hand, but an economic slowdown could hurt the recovering jobs market.

One big issue that isn't getting headlines this week
Unfortunately for the Fed, the decision on when and how to raise rates is not a two-variable equation. The U.S. economy is so complex that pulling one lever (like interest rates) can have unintended consequences elsewhere in the economy. Unintended consequences that could throw a monkey wrench into the whole machine.

The interest rate conversations this week have centered on inflation and jobs, but the real estate market is just as critical. Don't forget, it was a real estate crisis that instigated the entire Great Recession.

Why have we suddenly lost sight of housing? Because the data for new-home sales and existing sales has been very positive lately, following the ugly first-quarter disappointment.

Sales of new homes in May rose over 18%. Existing-home sales were up 4.9%. Those are huge numbers. Housing must be back on fire!

Right? 

US New Single Family Houses Sold Chart

US New Single Family Houses Sold data by YCharts.

Not quite.

Taking into consideration these hot numbers and the revisions to previously reported sales figures so far in 2014, the residential housing market looks only marginally improved from 2013. 

That huge bump in May? That's just a short-term movement caused by the pent-up demand from February and March. When the weather was cold, homebuyers were content to bargain hunt online instead of signing on the dotted line. When the weather finally thawed, those buyers hit the streets and made up for lost time.

Now, circling back to interest rates. If the housing market is just mediocre, what happens when mortgage rates finally start to rise (which they absolutely will as the Fed raises the federal funds rate and continues to wind down quantitative easing)?

Housing affordability will decline dramatically. The average U.S. mortgage rate for a 30-year loan is currently 4.12%, according to Freddie Mac. For a $200,000 loan at those terms, the monthly payment comes to $969. 

If mortgage rates rise to 6.75%, where they were in 2006 and 2008, that same loan would now carry a monthly payment of $1,297. That's a 34% increase in the monthly payment, more than enough to prevent many buyers from being able to afford that new home.

US 30 Year Mortgage Rate Chart

US 30-Year Mortgage Rate data by YCharts.

Rising rates are not just about an improving jobs market and inflation
The Federal Reserve will raise rates. Most experts think that change in policy will occur sometime in the next 12 to 18 months. When it happens, the underlying fundamentals driving the U.S. economy will look strong.

We know that because it's the nature of the decision to change policy; the low-rate policy was designed to spur growth in the wake of a once-in-a-generation economic crisis. With recovery comes a return to normalcy.

But when rates do begin to rise, a cascade of consequences will change the economic dynamics around the country. Growth will slow. Loans will become more expensive. The yield landscape for investors will change virtually overnight.

The hope is that the nation's economic engines will be strong enough to power through those headwinds. The risk is that still-fragile markets, like real estate, will shatter under the weight.

Protect yourself with a strong dividend portfolio
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers