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Forget Rates: Why Housing Prices Suggest the Recovery Will Gain Strength

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Our review of the data shows that prices, which are on the rise, are key to keeping the market thriving.

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Many have pointed to weakness in June data since rates have risen. We got the first glimpse of perceived weakness with June housing starts, which showed an extremely large 26.2% month-over-month drop in multi-family starts. To this, Andrew actually laughed, saying, that given the volatility and the unpredictable nature of when permits are pulled, you can only look at housing starts at a minimum on a quarter-to-quarter basis; they cannot be measured month to month. He concluded by saying that most likely, by the end of the year, we will see "continued steady progression," with the caveat that credit does, in fact, remain constrained in terms of bank lending.

Similarly, June existing home data, reported on July 22, came in below expectations of 5.26 million units, at 5.08 million units. Moreover, May's off-the-charts 5.18 million unit surprise was revised down to 5.14 million units, which is still a healthy number. But again, data shows that housing prices have a higher correlation than increasing or decreasing mortgage rates in relation to housing sales/purchases. From that perspective, in June, we also learned that the median price of homes sold went from $251,000 to $261,000, a 5-year high. Overall, home values are up 12% year over year nationally; in California alone, home prices have risen 28.3% year over year.

Finally, distressed sales in June as a percentage of total sales dropped from 18% to 15% month over month, and they are down from 25% year over year. So if one believes -- like we do -- that home prices, as opposed to mortgage rates, are the most important metrics in sustaining this recovery, common sense dictates that as more distressed properties are worked off the market, housing prices should continue to rise.

Swinging back to Mr. Chaban, he ended by again reiterating (in the context of higher rates) that "life goes on," and that he believes that at this point, the effect of "higher rates will most likely translate to a potential buyer buying less house, as opposed to not buying," thus mitigating the effects of higher mortgage rates. Andrew remains extremely constructive on housing for the foreseeable future.

Ben Bernanke himself has pointed to housing as one of the "bright spots" of the economic recovery. Bernanke recently espoused his belief that housing is again being looked at, by most Americans, as their number one investment. Again, we contend that as long as housing prices continue to rise, there should be little effect on housing, given supply /demand favorability, and restored faith from an investment perspective. The latter factor is important because under the premise of rising home values, home equity inherently increases, theoretically creating more personal wealth and trickle-down effects that may result from home equity lines of credit.

In light of some of this new evidence, using mortgage rates solely as a guide would be mostly unhelpful. There is a caveat here, as many economists contend that an inflection point may occur if the 30-year fixed rate eclipses the 6% threshold. This could be a psychological barrier for many buyers as well. Instead, we should look to home prices as a guide. Since prices are on the rise as well, one can conclude that the housing market will continue to strengthen in the coming months. Despite rising mortgage rates, the housing market will not stagnate -- in fact, it will improve. All it takes to prove this is a look at the last decade, from which there is most definitely a lot to learn.

And a bullish attitude never hurt, either.

About the Authors:

Joe Digiammo is the Managing Director of Equities at Mischler Financial. Prior to joining Mischler, Joe worked for Morgan Stanley in New York City in institutional equities, as a position trader and sales trader. In total, he has more than 18 years of experience in sales/trading and management.

David Michalowicz is interning with Mischler Financial Group this summer. He is a sophomore math major at Carnegie Mellon University.
No positions in stocks mentioned.
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