Some Housing Activity May Slow As Mortgage Rates Rise

Housing activity has been weak, according to recent data, since mortgage rates were raised by 50 basis points in October 2016. So does this mean that if the Fed starts raising rates, housing activity will remain soft? According to Goldman Sachs analysts, the answer to that question is mixed.

Housing starts have slowed

In a report dated June 26, Goldman Sachs analyst Jan Hatzius and team noted that housing starts have indeed slowed down recently.

They also note that new home sales in the U.S. have slowed as well, which is causing some to question the outlook for housing activity in general this year. Currently, they’re estimating a 1.5% decline in residential investments for the second quarter, which is a major slowdown from the 13.7% increase that was recorded in the first quarter and the 4.9% growth rate observed in last year’s second quarter.

However, they also noted that the question remains whether more improvements in the labor market and supportive fundamentals will be enough to offset the drag caused by rising mortgage rates. They point out that housing starts are now at around 1.15 million a year, but their trend demand estimate is at 1.4 million, including 200,000 demolitions and 1.2 million household formations.

Housing activity remains “resilient”

The Goldman team noted that mortgage rates have risen by about 50 basis points since October 2016, and they expect rates to rise by another 150 basis points over the next three years. They also tried to quantify the results of higher interest rates on growth in residential investments and mortgage and housing activity.

They also factored in their expectations for housing starts converging with trend demand and additional improvements in the labor market. Further, they compared the impacts of these changes to the flat interest rates before the election, combined with flat unemployment, a 1.75% increase in trend real output and 1.15 million starts in trend demand.