Why There's Trouble Ahead for the Housing Market

By Moe Zulfiqar

The housing market is one of the biggest challenges currently faced by the U.S. economy. When it improves, or when we see an increase in activity, then it can be assumed that there will be some economic growth.

For example, if there’s activity in the housing market, meaning that home buyers are buying homes, those home buyers are going to need things that are necessary to run households. This phenomenon has long-lasting effects: it increases consumer spending in the U.S. economy and creates jobs.

When the housing market in the U.S. economy improved in 2012, we saw the gains; but going forward, we are seeing a significant amount of trouble.

First of all, the U.S. economy is in jeopardy, on the brink of a monetary policy shift—the primary concern being quantitative easing. We are hearing the Federal Reserve will start to slow its asset purchases in September and end the quantitative easing by next year. This monetary policy by the Federal Reserve kept the mortgage rates in the U.S. economy low. This was great, as it gave Americans incentive to buy homes; as a result, we saw the housing market improve. Now, with the speculations on quantitative easing ending, the mortgage rates in the U.S. economy are increasing.

Consider the 30-year conventional mortgage rate tracked by Freddie Mac. In August, this rate stood at 4.46%; in the same period a year ago, it was at 3.60%, meaning it has increased almost 24% in the matter of a year. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site, last accessed September 11, 2013.)

While some will argue that these mortgage rates are nowhere close to what we saw in the 1980s—and I completely agree with them—this increase in mortgage rates makes homes in the U.S. economy less affordable due to higher mortgage rates and less incentive to buy.

Unfortunately, we have already started to see this problem emerge in the U.S. economy. Home buyers are hesitant to buy, which is certainly not a good trend when we are hoping for economic growth and prosperity.

For the week ended September 6, the Mortgage Bankers Association reported that the mortgage activity in the U.S. economy, including refinancing and home purchases, declined to the lowest level since November 2008—the time when the U.S. economy was going through the financial crisis. (Source: “Mortgage applications slide as rates match 2013 high – MBA,” Reuters, September 11, 2013.)

Rising mortgage rates and home buyers not being interested in buying is nothing but bad news for the housing market in the U.S. economy. Unfortunately, this is even worse news for the companies who are close to it. Take companies that are involved in the construction of homes in the U.S. economy, or in the development of new projects; would they be able to sell their projects well or get more construction deals when the housing market is slowing? I highly doubt it.

As the housing market shows signs of trouble ahead, companies such as home builders are becoming vulnerable. We have seen them decline and give away a significant amount of gains already, and more could certainly follow.

This article Why There’s Trouble Ahead for the Housing Market was originally published at Daily Gains Letter