U.S. Housing Drops 11.1% in May to 1.04 Million Annual Rate

U.S. Housing DropsThe U.S. home-building industry has taken off this year to its best two months in more than seven years as it heads into summer. However, it began work on fewer houses in May following an April surge.

On Tuesday, June 16, 2015, the Commerce Department reported the housing starts declined 11.1% to a 10.4 million annualized rate which followed April’s revised 1.17 million. (Source: U.S. Department of Housing and Urban Development, June 16, 2015.)

Permits for future projects climbed to the highest level in nearly eight years, reflecting that activity is likely to pick up. Permits for future home construction increased 11.8% to a 1.28 million-unit rate, the highest since August 2007. Permits have been above a one million-unit pace since July.

Mortgage Rates

A historic low interest rate is still supporting home buyers; the average rate on a 30-year fixed mortgage was four percent in the week ended June 11. Yet the rate has been below the average six percent in the last five years of the economic expansion that ended in December 2007, when the housing market boomed. (Source:Bank of America, last accessed June 16, 2015.)

On the other hand, soaring mortgage applications are usually an indication of a strong economy. But the recent bump in volume could actually signal that problems are ahead.

On June 10, 2015, the Mortgage Bankers Association reported that total U.S. mortgage application volumes jumped 8.4% from the previous week on a seasonally-adjusted basis. The refinance share of mortgage activity remained unchanged at 49% of total applications from the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.3% of total applications. (Source: Mortgage Bankers Association, last accessed June 16, 2015.)

Analysts fear higher mortgage applications may therefore not be a sign of an economic rebound, but rather of home buyers simply trying to time the Federal Reserve’s next rate hike.

Investors may be cautious that mortgage rates are tied to the Federal Funds rate. Higher interest rates could take the wind out of the housing market’s sails, zapping a home buyer’s purchasing power. As a consequence, industry experts are worried housing demand could slow down.