Pondering Interest Rates

So, what do we have here? U.S. April New Home Sales fell 11.8% — their biggest monthly drop in more than 10 years.

Funny how a one-percentage-point increase in the 30-year mortgage rate makes such a big change in new housing demand. Funnier still is how all the experts thought a one-percentage- point change would not make that much of a difference in housing demand.

New home sales only account for 15% of all U.S. home sales, but are considered to be a “harbinger” of the existing home sale market. The price of a new home has risen to a current average of $221,200, up at least 10% from last year. But the real negative is inventory. At the end of April, the inventory of new homes in the U.S. grew to a 4.3-month supply from a 3.7-month supply at the end of March. That means new homes are selling at a slower pace.

This recent negative news on the U.S. new home market leads me to believe Greenspan will not raise interest rates at the June Fed meeting. While I may not agree with Greenspan’s actions, the Fed chief knows how important it is to keep the U.S. consumer spending, spending, spending. There’s an election around the corner, and the politicians would obviously prefer a happy consumer on Election Day, so Greenspan may abide.

The bond market is betting on higher rates ahead. And unless we get some more negative economic news, most analysts are expecting the Fed to raise rates in August.

Of most interest to me is how a one-percentage-point rise in U.S. rates cooled the U.S. new home market so quickly, while Britain’s housing market is robust despite the increase in its domestic interest rates. The Bank of England has raised rates three times in a row, and rates are expected to rise another fifty basis points there by year-end. The average house price in Britain is the equivalent of $270,000, still much higher than here in the U.S.

I’m sure Greenspan has been watching the rate hikes in the U.K. to see how they would affect the demand for housing there. With the global economy, one would only logically expect the same type of response here to higher rates. So far, it looks like the U.S. is much more sensitive to interest rate hikes than other countries. Could Greenspan surprise everyone and not raise rates until the election? I wouldn’t be shocked if Greenspan did defer his expected call of a rise in rates. But all that would mean is a quicker acceleration of rate increases after the election.