It looks like housing and mortgages are still dragging down the economy. U.S. economic growth partially depends on people borrowing money to buy houses, but that’s dropping.
Nick Timiraos wrote for the Wall Street Journal that mortgage lending is at a 14-year low:
Mortgage lending declined to the lowest level in 14 years in the first quarter as homeowners pulled back sharply from refinancing and house hunters showed little appetite for new loans, the latest sign of how rising interest rates have dented the housing recovery.
Lenders originated $235 billion in mortgage loans during the January-March quarter, down 58% from the same period a year ago and down 23% from the fourth quarter of 2013, according to industry newsletter Inside Mortgage Finance.
The decline shows how the mortgage market is experiencing its largest shift in more than a decade as an era of generally falling interest rates that began in 2000 appears to have run its course. The average 30-year fixed-rate mortgage stood at 4.5% last week, up from 3.6% last May, when interest rates shot up in reaction to the Federal Reserve’s initial indication that it might reduce a bond-buying campaign that was, in part, designed to keep a lid on long-term rates like mortgages.
The decline in mortgage lending last quarter stemmed almost entirely from the slide in refinancing. Loans for home purchases were basically flat from a year earlier and down from the fourth quarter.
Writing for the New York Times, Neil Irwin said that the drop in investment property purchases was another stumbling block:
But there’s another reality that is more important for the national economy. Except in a few booming markets, housing is nowhere close to pulling its economic weight. Consider this:
Investment in residential property remains a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20 percent, or the early 1990s, when hundreds of mortgage lenders failed.
If building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4 percent, from today’s mediocre 2-plus percent. The additional building, renovating and selling of homes would add about 1.5 million jobs and knock about a percentage point off the unemployment rate, now 6.7 percent. That activity would close nearly 40 percent of the gap between America’s current weak economic state and full economic health.
So what is holding housing back?
Sure, a glut of housing was built during the last great mania, and in some markets buyers are still working through those supplies. Bank lending is only now thawing, both for homebuilders and buyers. But those restraining factors have eased a lot in the last few years. The bigger thing holding back housing is simply demand. Fewer people can or want to fulfill the American dream of starting a household of their own.
But builders aren’t necessarily feeling good about what’s to come, according to Forbes’ Erin Carlyle:
Other measures indicate a bit of unease regarding the future. Builder confidence in the market for newly built, single-family homes stood at a level of 47 in April, according to the latest read from the National Association of Home Builders/Wells Fargo Housing Market Index. A score of 50 or greater indicates that more builders view market conditions as good than poor.
And although housing starts (or groundbreakings) rose 2.8% in March to a seasonally adjusted rate of 946,000, the pace is still 5.9% lower than the rate one year earlier. Building permits, a good indicator of the future, stood at 990,000 (seasonally adjusted) in March. That’s 2.4% below the revised February rate, the fourth drop over the last five months.
Reuters’ Lucia Mutikani said that the weakness could keep interest rates low:
But the new home sales data and another report on Wednesday showing a drop in mortgage applications both suggested it would probably be a while before housing found its footing.
The sector’s weakness could help convince the Federal Reserve to keep benchmark interest rates near zero long after it ends a bond-buying stimulus program later this year.
Even so, it is unlikely to derail the economy given that other sectors, such as manufacturing, are regaining momentum.
Financial data firm Markit said its preliminary manufacturing purchasing managers index was little changed in April. The survey’s measure of output, however, hit its highest level since March 2011, with new orders increasing.
“This improvement is broadly consistent with our view that manufacturing production is going to pick up in the second quarter following a soft first quarter,” said Daniel Silver, an economist at JPMorgan in New York.
Though new home sales are volatile month-on-month and account for less than 10 percent of the overall market, the drop in March confirmed that housing would again be a drag on gross domestic product in the first quarter. In the fourth quarter, it subtracted from GDP for the first time in three years.
Buying a home is a particularly personal decision. As the economy continues to struggle it’s easy to blame it on a particular asset class, but the story is more complicated than that. People obviously aren’t feeling great about their jobs or the ability to earn more money, and neither are banks since they’re not lending as much. Really, the U.S. needs to find another way to stimulate growth.
