Tuesday, February 13, 2018

Mortgage growth

The New York Fed's Household Debt and Credit Report is out for 4Q 2017.  Mortgage growth is building.  This is in spite of rising rates and low lending growth from commercial banks.

Homeownership rates seem to have bottomed and there are some signs that home price growth has lately been stronger in low tier markets than in high tier markets.

I have been waiting for both of these things to happen - a Fed tightening cycle and a loosening of credit standards.  I think both of those things will make interest rates rise.  If loosened credit standards can lead to rising rates (from more borrowing, increased building, etc.) faster than the Fed raises the policy rate, then de facto monetary policy may not tighten so much.  The Fed would be facing a rising neutral rate.  We can hope.

But, if that is the case, home prices, borrowing, and buying by households on the margin will increase.  All of those things will trigger the same moral panic that happened in 2007, to some degree.  Will that lead to over-reaction?

This is bullish for some homebuilders.  But, if low tier home prices grow by 10% this year and entry level homebuilders start to see rising sales, the question is what will the policy response be?  There shouldn't be political risk here, but unfortunately, the public and policymakers have decided that this is an area where we should impose our will on markets.  If there is an over-reaction, interest rates will fall and homebuilders will have to wait longer for recovery.  If there is not an over-reaction, then interest rates might rise and homebuilders will see bright prospects.

There is potential for a hedged position there, between interest rates and homebuilders, and a carefully created one might provide net expected gains.  The relationship is the opposite of what we might normally think of.  Rising rates will be related to rising home sales.  But, the secret is in the timing and the choice of securities.  The last couple of weeks have not been friendly to this theory, as homebuilder stocks tumbled while interest rates rose.  The question, as always, is whether that is a rejection of the hypothesis or a buying opportunity.


  1. I'd suggest you take a look at residential reit's and the residential housing equities (e.g., AMH). I believe they are at discounts to NAV (assuming no price appreciation) and have traded far worse than homebuilders.

    1. Thanks for the tip. I'll look at that one. It's definitely a place to look.

  2. Interesting chart. Still, mortgage growth weak compared to 2000-2007.

    As an investor I have no clue, except I expect increasing housing scarcity in some markets. We are not building much.