Housing Starts and Builder Confidence Rise Boosting Housing Sentiment

Volatility turned to positive news this week in Housing Starts and Builder Confidence. Also covered are updates on interest rates and mortgage applications. Lastly we’ll review the upcoming news for this week as the housing market turns towards October.

Housing Starts Notch 3^rd Month of Gains

The Commerce Department announced housing starts rose 0.3% during the month of September, the 3^rd straight increase. The increase annualized would be 610,000 units. August was revised higher than previously reported to 608,000 from 598,000. Single-family homes rose 4.4% to 452,000, the highest level since May. Meanwhile, multi-family starts dropped 9.7% to a 158,000 annualized rate. They had previously risen by nearly 40% in August and July.

The improvements we’re seeing in the housing market are welcome. Seeing health particularly in the single-family sector is encouraging. The 4.4% increase beat many analysts estimates. Important to note though is that building permits rose only 0.5% forecasting more modest increases while apartment and condo building permits fell 20.2% on the month. Lastly, the Commerce Department report has over a 10% margin of error. Additionally the prior months will likely get revised but over time it does dictate a trend. That trend right now is that housing has bottomed out on the construction side and is likely to continue to see some building activity.

Interest Rates Show Slight Rise

Freddie Mac reported that interest rates rose on the 30-year fixed and the 15-year fixed last week. The 30-year fixed, the barometer of mortgage rates rose to 4.21% from 4.19%, while the 15-year fixed rose from 3.62% to 3.64%. Freddie Mac’s chief economist Frank Nothaft pointed to the mixed inflation signals (Producer Prices rose while Consumer Prices fell) as the reason rates held relatively steady.

Overall there hasn’t been much serious news to get interest rates off their lows. The housing market did see a 4.4% rise in single-family home construction and a rise in home-builder confidence. If signs of recovery is what the market is looking for, it will have to accept modest signs. In the meantime, I think we’re going to see rates below or around 4.5% for the remainder of the year.

Mortgage Applications Give Back Last Week’s Gains

Giving back the previous gains we had in both the Purchase and Refinance Indicies, the Mortgage Bankers Association reported strong drops in mortgage applications over the week. The Market Composite Index dropped 10.5%. This was lead by a large drop in refinance activity (Refinance Index down 11.2%). The Purchase Index dropped 6.7% for the week. The 4-week moving average for the Market Composite Index is now up just 0.4%.

With rates dropping during the survey period and refinances slowing down, it makes me question how low rates can drop. Purchase applications were expected to drop after the rush to beat the new FHA guidelines. I think we’ll see this stabilizing and get closer to an flat or slightly upward 4-week moving average (current is down 1.1%). The Purchase Index is the one to watch to judge the real health of the market during this fall/winter.

Builder Confidence Rises but Still at Dismal Level

The National Association of Home Builders reported that builder confidence rose in October from a 13 to 16 in its Housing Market Index(HMI). This was the first increase in the Housing Market Index in five months and the highest level seen since June. The HMI has 3 categories; sales conditions, sales expectations, and traffic of prospective buyers.

Builder confidence is rising but is still very low. The confidence in increasing primarily due to builders expecting sales to rise in the next six months. Unfortunately confidence in the financing markets is still dismal. So the increases are obviously tied towards consumer sentiment. Buyers are returning to the market (even if slowly), and that’s trickling over to the builders. I’m expecting that we’ll see these conditions improve over the next month or two. I’m concerned if the number can sustain as the second decline in home prices is just getting under way.

On the Docket

This week, we’ll see housing price data from Core Logic. Expect declines. In fact, expect the double-dip in prices to get in full swing by years end. I still think these declines will be modest. Home prices are also due to be reported from Case-Shiller and FHFA. I’m expecting declines across the board on all. Existing Home Sales are due out from the National Association of Realtors this week. I’m expecting an increase here as well maybe even a surprise to the upside. The Census Bureau will report new home sales as well. The consensus here calls for a decline. Of course we’ll also get a rate update from Freddie Mac and mortgage applications from the Mortgage Bankers Association.

This week should give us even more insight into the housing recovery. At this point I think to call it anything but a recovery makes little sense. There are plenty of sings that life is coming back into the market. Housing starts are rising, builder confidence is improving (even if slightly), mortgage application activity is bouncing around near no change, and we’ve seen recent rises in pending and existing home sales.

Photo: Brock Builders

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.