It's only been two weeks since I wrote the December column "Homebuilders' Stocks Rising Along With Mortgage Rates, but Why?" What's happened to the housing market during those two weeks is instructive of a whole raft of issues I've written about this year.
As long-end Treasury yields and mortgage rates surged following the election of Trump, home purchase activity immediately declined and has continued sliding since.
According to a Mortgage Bankers Association news release today, mortgage applications for both purchases and refinances decreased over the last two weeks, despite mortgage rates declining slightly during that period.
Exactly how much purchase activity decreased is not as important as the fact that it did: Fact is, there is no pent-up demand for home purchases.
This should come as no surprise, as I wrote in the October column "Housing Activity Shows No 'Paradox of Thrift'," specifically about housing, and in the column "Fed Fails to See No Pent-Up Demand Is Left" concerning consumer demand broadly.
Buyers, especially first timers, are extremely sensitive to mortgage rate increases and respond immediately to them by withdrawing from the purchase market with the overwhelming reason for doing so being necessity, not choice.
In just the last six months, debt-service carry costs for newly-originated residential mortgages have increased by about 15%. Put another way, affordability has decreased by about that same percentage. The same potential home buyer that qualified for a $300,000 mortgage in July, now qualifies for only $255,000.
In most U.S. suburban markets that decrease in affordability over such a short period is a deal killer for first-time buyers.
What this portends about the housing market outlook for the spring has still not settled in with investors, however, as Beazer Homes USA (BZH) and Hovnanian Enterprises (HOV) are both down by only about 6% in the last two weeks.
Investors in these stocks, the housing sector broadly and the stock market in general are still pricing in the expectation that the post-election increase in consumer confidence will be exhibited as an increase in marginal consumer spending this year and that that will become the catalyst for a broader increase in spending and economic activity.
In other words, they still believe there's pent-up demand.
Pent-up demand and the actualization of it are both economic and social manifestations. The idea is that during economic contractions or slow-downs confidence and spending decrease while saving increases. The increase in saving provides for the possibility of pent-up demand. Once confidence rises again the actualization of pent-up demand at the margin, by first-time buyers, causes confidence and spending to increase by those who follow.
For that to work the decrease in confidence and spending during the economic slow-down has to be offset by an increase in personal savings. It's that increase in savings that provides the principal catalyst for an increase in confidence.
But the problem is that hasn't been happening. In fact, the opposite has happened, as the personal saving rate has declined through this year from about 6.2% to 5.5%.
The bottom line is that there is no pent-up demand, even as debt capital costs are rising. The only thing that can happen as the result of increased debt capital costs in this environment is spending and economic activity decline.
All of this is occurring in an environment where consumer confidence has increased substantially in the post-election environment.
That's not real confidence, though; it's hope. Confidence is the belief that something will happen. Hope is the desire for that something to happen.
Right now the post-election euphoria being expressed by investors and consumers is based more on hope than confidence.
The sobering of both groups is likely to occur shortly after the inauguration as the realization of the real environment begins to set in. That will happen no later than March when debates over Trump's fiscal plans get enmeshed in the debt-ceiling fight.