At one level and, maybe, at several levels, this looks like good news.
Buyers are rushing back into the housing market, enticed by record low mortgage rates and a pandemic-induced need to nest like never before.
Mortgage applications to purchase a home rose 4% last week from the previous week and were a remarkable 21% higher than one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. That was the ninth consecutive week of gains and the highest volume in more than 11 years.
“The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said MBA economist Joel Kan.
Buyers were also fueled by a new record low mortgage rate. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 3.30% from 3.38%, with points decreasing to 0.29 from 0.30 (including the origination fee) for loans with a 20% down payment.
Housing starts, meanwhile, may have disappointed, but, the increase in permits also delivered a somewhat upbeat message.
Permits for future home construction rebounded 14.4% to a rate of 1.220 million units in May, reinforcing economists’ expectations that the housing market will lead the economy from the recession, driven by historically low mortgage rates.
I am unconvinced by the idea of a “pandemic-induced need to nest.” Greater affordability on the back of ultra-low interest rates seems like a more plausible explanation. Nevertheless, increased willingness to take on the capital commitment of a new home is, almost by definition, a sign of growing confidence. That said, with those low rates seemingly ‘guaranteed’ for a long time, I cannot help wondering whether this is an early (putting the stock market to one side — for now) sign of asset price inflation to come.