Although housing activity has remained relatively subdued since the financial crisis, signs are pointing to a pickup during the critical spring selling season. Banks seem more willing to lend at a time when prospective homebuyers are showing increased interest, giving homebuilders confidence to break new ground. This is abundantly evident in new data on housing starts, which reached their highest level since 2008 in April. These developments may have important implications for the outlook on monetary policy and the financial markets.
We see a clear sign of improving demand for housing in recent data on mortgage applications as well (see chart). The pickup could well reflect a diminishing “fence-sitter” effect, whereby prospective homebuyers jump off the fence fearing higher mortgage rates. This makes sense given that the Federal Reserve is widely anticipated to raise interest rates sometime this year.
In addition, the Fed’s latest quarterly survey of senior loan officers showed a further easing of conditions for approving mortgage loans, suggesting that banks are becoming more willing to lend to homebuyers.
Finally, other contributors to an improving housing market include steadily improving U.S. employment and relatively high consumer confidence – two pillars of the housing market, with the latter noted in the Fed’s most recent policy statement.
Strength in the housing market will help promote further improvement in the labor market, the major condition the Fed has set for it to decide on an interest rate hike. We expect this to occur this year, possibly by September. These data therefore support underweights to portfolio duration and positioning for a flatter yield curve, as well as long positions in the U.S. dollar. Housing-related investments, including in non-agency mortgages, look attractive.