HISTORY TELLS US THE HOUSING MARKET WILL BE FINE IF RATES RISE
General wisdom is that when the U.S. Treasury rates rise, mortgage rates rise and when mortgage rates rise the housing market suffers. Given that the U.S. 10 Year Yield (10-Year) and the Average 30 Year Mortgage are at or near historic lows, housing prices are at historic highs after a recent heady rally, and Home Builders have far outperformed the overall market YTD (ITB +23%, S&P500 +9%), TPA felt that it was time to do a deep dive into the historical relationship between rising yields and the housing market.
Spoiler warning – the story as understood by “general wisdom” has plenty of holes......
TPA continues to believe that the housing market is on strong footing and will do well going forward. There is still a large technical question about whether the 10-year will continue its recent rise. So far, mortgage rates are not falling in line. Even if rates do rise, historically higher rate periods, as measured above since 1998, do not seem to have a consistent negative effect on the housing market.
The table below looks at the periods since 1998 in which the 10-Year rose considerably. Those periods are: 10/5/98 to 1/20/00 , 6/13/03 to 6/14/04, 12/30/08 to 4/5/10, 7/4/12 to 12/13/13, 7/8/16 to 3/13/17, and 9/7/17 to 11/8/18. The average rise was 73%, the low +56% and the high +94%. TPA then measured the change in the average 30-year mortgage, average U.S. home price, and existing home sales for each period.
1. Mortgage rates – generally rose with the 10-year. The average rise was 20%, which was far less than the average increase of the 10-year (73%).
2. Home prices – usually fell when rates rose. Home prices only rose 17% of the time when rates rose. A closer look, however, shows that, on average, prices were flat in rising rate environments, with an average increase of a scant 0.79% in the 6 rising rate periods. The best price rise for a rising rate period was 10% from 6/13/03 to 6/14/04 and the worst decline was down 7% from 7/8/16 to 3/13/17.
3. Home sales – were not really affected by rising rates and were only down half the time when rates rose. On average, over the 6 periods, home sales rose 6% in rising rate periods.
What about the charts?
U.S. 10 YEAR YIELD
The U.S. 10-Year Yield broke out of its 7-month downtrend in August and has slowly started to rise after trading sideways for 5 months. Chart 2 shows that using a slightly longer timeframe, however, the 10-year is still in the throes of a longer-term (2-year) downtrend and needs to confirm a move above 1.00% to breakout. The 10-year has been in a descending range/descending channel for the past 30+ years. Currently the 10-year is closer to the lower extreme of the channel than the upper extreme, but could go either way (chart 3).
AVERAGE 30 YEAR MORTGAGE RATE
Over the past year, the average 30-year mortgage rate has fallen as the 10-year has declined. The chart below, however, highlights the most recent period since the end of July, in which the 10-year has gone up, but mortgage rates have remained stable. Chart 2 shows that, since 7/31/20, the 10-year rose 68%, but the average mortgage rate fell 4%. Over the past 10 years, mortgage rates have followed the 10-year in most cases. The exception was the end of 2019 when, like the current situation, the 10-year rose, but mortgage rates did not follow suit. What followed the aberration in 2019 was that both the 10-year and mortgage rates fell to new lows in 2020
U.S. HOME PRICES & HOME SALES
Home prices have not only continued to rise in 2020, but have hit new records. Surprisingly, home prices have broken out of a consistent pattern. Normally, home prices hit a peak in June and then taper off to their usual lows in January and February. This year prices have continued to rise well after June. Chart 2 shows that home sales numbers have also spiked and have a way to go before hitting the peaks achieved in 2005.