Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: FiveFour who wrote (1394)	3/6/2004 4:24:57 PM
From: mishedlo	Read Replies (3) of 116555

Splotto on Housing note: he is a homebuilder Mish: Rates can go up and down in an orderly manner and housing will remain strong provided there is price inflation to go along with it (if you think about, you can even do without wage inflation). We have moved in such a narrow range for rates for so long that I don't think that the impending rise/fall is making anyone act/wait at all. Let's look at the 10 year yield as a proxy for mortgage rates (shape is the same roughly): stockcharts.com[w,a]daclyyay[de][pb50!b200][vc60][iUb14!La12,26,9]&pref=G If we look at a peak in August 2003 at 4.6% and a bottom of 3.1% it has been in that range from August 2002 through March 2004. We are closing in on 2 solid years of relatively stable rates. People who bought 2 years ago aren't looking at new mortgages that are 3-4 points higher. They might even be lower. I am more and more convinced that underlying existing home price appreciation is doing more to drive the new home market then low rates. People who bought in the last 18 months will consider moving yet again as the see $100k dropped in their lap from appreciation. That let's them move up to a bigger house 'for free' in their minds. In order for the price appreciation to continue to fuel the buying, you need to have people willing to buy your house. That brings into play your saturation point. The saturation point is important. At some level, new home construction less demolitions surpasses population growth (in the purchaser demographic excluding children). Marriage rates also get figured in there. Since the industry lags demand horribly (we are delivering approved lots now that whose raw land entered the pipeline 3 years ago!) price declines are the only way to know when demand subsides. As I said in a previous post on the HOMEBULDERS board, forget looking at housing starts as a guide to the slack in demand. Look at the home prices as your guide. Given that this market is running on a non-volatile economic base (rates flat for 2 years now) and given that the real demand is driven by the asset appreciation of the underlying homes (which acts like a supercharger or a multiplier, making many more buyers then there would be if prices were stable) when underlying home prices level and fall, the demand will falloff much faster from a percentage standpoint then the fall in prices. Splotto

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