Wednesday, October 30, 2013

How Higher Mortgage Rates Increased House Prices




Higher mortgage rates lower house prices not increase them, but this month is an exception.  The Case Shiller 20 City August closing data released on October 29 is based on June price negotiations.  The 30 year mortgage rate began to increase in June, up 0.5% from the previous month to 4.1%.  But after falling 70% in the previous 4 months, prices went up from an annual rate of 7.5% to 11.8% in the June negotiations.  This is illustrated in the graph below.  The most likely explanation is the rush to buy before mortgage rates go even higher drove prices higher.  


The Case Shiller year over year comparison is up 12.8% - a six year high. If the monthly increase next month remains the same as this month’s 11.8% annual rate the year over year will be 13.2%.  If it drops to the last months 7.5% rate it will remain at 12.8%.

The mortgage rate for July negotiations will increase by 0.3% to 4.4% so there could be a similar increase next month. That should be the end of price acceleration.  The higher mortgage rates will add to the down ward trend so prices will be falling by the January 28 report. 

Monday, October 14, 2013

Collapse of S&P Homebuilders ETF



Case Shiller’s 20 city year over year index is the most widely followed indicator of housing strength. The SPDR S&P Homebuilders ETF has followed this indicator more than doubling in the last two years. Both the Case Shiller and the Homebuilders ETF have plateaued.

The Market does not understand the two weaknesses of the Case Shiller data. 


  •   The higher mortgage rates are not in the data yet.  Prices announced at the end of September are for July closings which were negotiated in May, The 30 year mortgage rate in May was 3.5%.  The current rate is 4.5%. The impact of the higher mortgage rates will not appear until next month’s report on June negotiations which were driven by a half point rise in mortgage rates.
  • Price increases in the latest Case Shiller report are down to a rate of 8% per year in July closings from 23% in March.  A trend line using the last four months data produces a 3% price increase next month and a 2% annual decrease in the data released on November 26.  These numbers do not include the effect of the higher mortgage rates so the actual data will be even lower.


More information on the monthly price trends is in the September 25 post: (House Prices tracking to decline in two months), at housingcycles.blogspot.com.

The ETF Homebuilder index contains home builders, building products manufacturers and DIY retailers.  A building products company with a branded product will be hurt much less as will the retailers because the remodeling market is more stable than new construction and provides better margins.
   
Robert Shiller deserves his Nobel for his excellent work on bubbles, but not for the Case Shiller index. He also showed good judgment in passing this index to S&P who focused on the yearly data which masks all the monthly trends data building an undeserved confidence. However the investor who relies on this misleading index will not get a prize.  But then many feel that two out three winners isn’t bad.