U.S. Economy Grows -- Housing Boom Continues?
The economic signs look good.
The nation's gross domestic product -- which is the value of all goods and services produced -- rose at a 3.1% annual rate during the first quarter, down from a 3.8% rate in the final three months of last year, the Commerce Department reported Thursday.
Some bears quickly pounced on the news, saying it was the slowest rate since 2003.
The Washington Post summed up the dark side:
"The news confirmed other recent signs of a cooling economy. Job growth, retail sales, factory production and consumer confidence fell in March. New orders for big-ticket manufactured goods have declined in each of the past three months. The trade deficit keeps growing to new monthly records."
Yes, the economy is "cooling." Another term to describe it may be "leveling off."
But other signs, such as record earnings growth and that strong GDP growth number, continue to show that despite things like record oil prices and the massive trade imbalance, the U.S. economy is more than puttering along.
We still argue that the single largest factor driving the U.S. economy is the residential home market.
When it goes, the rest of the economy will go with it.
With interest rates rising, the party may soon be over for the housing boom.
This week we learned that sales of existing homes and condominiums rose by 1% in March to the third-highest sales pace on record, while the nationwide median price jumped by the largest amount in more than 14 years, a real estate trade group reported Monday.
Meanwhile, housing starts -- new housing projects -- actually fell off a cliff in March, declining by almost 18%!
How does one reconcile the boom in existing home sales with the crash in housing starts?
Easy: consumers' worries about future interest rates.
In a previous MoneyNews, we detailed a leading South Florida mortgage broker who said his business was booming, despite the fact that mortgage rates looked like they were edging up.
He said homebuyers were in "panic" mode to close deals now and lock in lower rates before they went much higher.
This may explain why homebuyers are quicker to buy an existing home (and lock in their mortgage rate) than a new-construction home, in which case the rate won't be set for another 6 to 12 months.
Since the brief spike in mortgage rates, long-term rates have been trending down again. But that is a momentary respite.
The Fed interest rate hikes have, so far, had little effect on long-term rates and mortgages.
Know this: The Fed will be more likely to raise short rates even higher.
But this economic oddity -- long-term rates falling as short-term rates rise -- will soon come to an end. And when it does, the economy will be in for a tailspin.
Most real estate watchers -- we talk to some of the biggest real estate firms in New York -- say the nightmarish scenario will begin to hit in 12 to 24 months. That's when long-term rates will start matching the increases in short-term rates. And that's when ARMs (adjustable-rate mortgages) -- which account for more than a third of all mortgages -- will begin to be hit with rate hikes.
We are already seeing parallels to this scenario in Britain.
Interest rates have risen, and so have mortgage rates. The housing market has plunged.
In fact, this week the British press reported that mortgage foreclosures "have surged to levels not seen since the Conservatives lost power -- suggesting the succession of interest rate rises is finally taking its toll on Britain's homeowners."
"It is the first sign that the borrowing explosion which has fueled the economy for the last two years is starting to rebound on families who overextended themselves when home loans were 3.5%."
Sounds like a story we may be reading in the Wall Street Journal in late 2006. |
