Has the Housing Rally Stalled?

According to the people who build houses for a living, the housing rally has lost much of its oomph in recent months. Whether or not it regains momentum probably depends a great deal on what happens next with mortgage rates.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) polls new home builders on both conditions they are seeing now, and what they anticipate happening over the next six months. As such, it provides insight into how conditions compare now with were they were in past months and years, and also provides some clue as to what may be in store going forward.

As things stand now, home builders are certainly not pessimistic. However the "onward and upward" spirit of the housing market seems to have been downgraded to something more like "steady as she goes."

Progress Peters Out

In January, the HMI slipped by a single point, to a level of 56. A change in the index of one point one way or another is not of much consequence, but what is more significant is the trend over the past six months. The HMI first climbed to 56 in July, and since then it has bobbed up and down slightly, essentially treading water to reach January of this year at that same level.

What appears to be sinking rather than simply treading water is the component of the HMI that measures what builders expect conditions to be like in six months. This peaked at 68 in August, but by January had fallen to a level of 60.

On the whole, home builders are still optimistic. The way the HMI is constructed, any reading above 50 indicates that more builders feel conditions are good than bad. The difference is that while that optimism was building in the first half of 2013, it seems to have faded a bit in the second half.

Optimism Fades as Mortgage Rates Rise

An important context to that fading optimism in the second half of 2013 is that it coincides with a period of higher mortgage rates. Low mortgage rates certainly deserved much of the credit for turning the housing market around; the question now is whether that market can survive without extraordinarily low mortgage rates.

According to mortgage finance company Freddie Mac, 30-year fixed mortgage rates rose by over a point from early May of last year to mid-July. After that, they have had their ups and downs but overall have leveled off. Significantly though, the point at which the growing optimism of home builders cooled coincides with when the market had to start dealing with higher mortgage rates.

The low mortgage rates of early 2013 are not likely to return, but whether or not the housing market can regain momentum may depend on where those rates go from here. In the closing months of 2013, signs of improvement in the economy were convincing enough that the Federal Reserve announced in mid-December that it was beginning to back away from its quantitative easing tactics - tactics that had been instrumental in holding mortgage rates down.

Since then, a discouraging employment report has raised new doubts about the economic recovery. All eyes will be on the Fed meeting in the last week of January, to see if they continue to dismantle quantitative easing, or decide they need to keep mortgage rates low a little longer.

Stability for Buyers

It should be noted that while mixed signals from the economy may have raised some questions among builders, overall the past six months have provided buyers with a fairly stable environment in which to make decisions.

According to the S&P/Case-Shiller Home Price Indices, the pace of home price changes, which peaked just last year just before mortgage rates started to rise, slowed considerably later in the year. Meanwhile, 30-year fixed mortgage rates have spent most of the past six months bouncing in a fairly narrow range before 4.25 and 4.50 percent.

For buyers then, this is a time when they can shop for mortgages and houses without feeling they are chasing a fast-moving target. That does not mean this is a good time for prospective buyers to get complacent - when it comes to housing prices and mortgage rates, nothing is more fleeting than stability.

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