ABA Banking Journal
No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
SUBSCRIBE
ABA Banking Journal
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
No Result
View All Result
No Result
View All Result
ADVERTISEMENT
Home Economy

The Economy as a Leading Indicator for Housing

August 24, 2015
Reading Time: 3 mins read

By Douglas G. Duncan

Things have been looking up in housing. Sales are rising, starts are 
strengthening, consumer attitudes are improving and prices are rising. 
This is in line with our forecast of a better 2015 than 2014. However, 
housing market participants are a bit nervous about the pending change 
of Federal Reserve policy and its potential impact on mortgage rates 
and the performance of their sector of the economy

That is a reasonable view given the evidence from the “taper tantrum” of the second half of 2013, the change it drove in interest rates (up over 100 basis points in 6 months) and the resultant impact on housing in 2014 (down from 2013). We don’t think the expected change in the federal funds target, which we believe will happen in September, will generate a “tightening tantrum” spike in 10-year treasury rates, but it is not out of the question. Despite some pretty significant signals of a September rate increase by the Fed, markets still assign a low probability of that increase in September, which suggests some degree of surprise unless that expectation changes over the next couple of months.

There are some misimpressions about the relationship between interest rates and housing activity. If interest rates are rising because the economy is growing—and real incomes are growing with it—then housing does fine as the rise in income covers the additional payment on the mortgage resulting from higher rates.

This is, in part, behind our thematic description of what we have expected for 2015: “The Economy Drags Housing Upward.” We expected the 3 million jobs produced in 2014 to be paired with rising incomes in 2015, which seems to be occurring. This in turn would increase household formation, which is occurring; which would increase demand for housing, which is occurring. Particularly important has been the rapidly improving employment of 25- to 34-year-olds. Interest rates have risen modestly, but housing is improving.

There are other aspects of the relationship of interest rates to housing. If rates are rising because inflation expectations are rising, households appear to view housing as an intermediate term inflation hedge and housing does fine. If rates are rising because the central bank perceives inflation risks and is acting to slow the economy then employment and incomes slow and the number of homes sold falls, not prices.

Nominal interest rates are not directly related to nominal house prices. 
In periods when rates rise rapidly 
in a short time period, incomes 
can’t adjust and home sales fall, 
not prices. This was the sequence 
of events in the rapid rate rises 
of 1994-1995, 1999-2000 and 2013.
Our expectation is that Fed policymakers are fully aware of this relationship and it is one factor in their thinking, since they comment on the state of housing in each of their post-meeting releases. We believe that they will change policy rates slowly and that, in general, mortgage rates will be low for long as the short rates rise faster than long rates and the yield curve flattens. The Fed is, however, already tightening policy as their purchase of replacement for maturing securities is shortening the duration of their portfolio. This is a reversal of Operation Twist and constitutes tightening.

Considering all these relationships, we think housing will continue improving at least through 2017 in a modestly rising rate environment. Currently the biggest constraint in some markets is the lack of supply. New home construction is still well below what demographics would suggest is normal. It will be a couple of years at least before construction reaches that level and in the meantime sales will continue to rise incrementally and prices will rise as The Economy Drags Housing Upward. For the risk managers reading this, note that we are about at the seven year mark of this expansion. The post-World War II average is around six years and our longest one was 10 years. Just sayin’.

Douglas G. Duncan is SVP and chief economist at 
Fannie Mae.

ADVERTISEMENT
Tags: FOMC
ShareTweetPin

Related Posts

FDIC: Number of unbanked households drops to new low

Kansas City Fed economist: Bank On may have reduced unbanked rates

Community Banking
May 19, 2025

An increase in the number of financial institutions offering Bank On-certified accounts may have contributed to the decline in unbanked households by lowering barriers to account ownership, according to new research.

ABA DataBank: Higher costs, less credit

ABA DataBank: Higher costs, less credit

Economy
May 16, 2025

Despite temporary tariff relief, small businesses still face elevated costs from historically high tariffs on Chinese goods.

CFPB proposes to regulate large nonbanks in personal loan market

Survey: Customer satisfaction with personal loans holds steady

Mortgage
May 16, 2025

Overall customer satisfaction with personal loans has remained largely flat, according to J.D. Power’s 2025 U.S. Consumer Lending Satisfaction Study.

CFPB releases mortgage servicing proposal, overhauls loss mitigation framework

CFPB ends pandemic-related mortgage foreclosure relief

Compliance and Risk
May 16, 2025

The CFPB issued an interim final rule ending protections for mortgagors experiencing hardships due to the COVID-19 pandemic.

Consumer Sentiment declined in April

Preliminary: Consumer sentiment fell 1.4 points in May

Economy
May 16, 2025

The University of Michigan Consumer Sentiment Index decreased 2.7% in May compared to the month prior, landing at 50.9, according to preliminary results for the month.

Housing starts rise in August

Housing starts rose in April

Economy
May 16, 2025

Housing starts increased by 1.6% in April from the month prior to a seasonally adjusted annual rate of 1.34 million, the Commerce Department reported.

NEWSBYTES

Proposed amendment would add Credit Card Competition Act to Senate stablecoin bill

May 20, 2025

FDIC rescinds 2024 bank merger policy

May 20, 2025

FDIC provides update on Deposit Insurance Fund restoration

May 20, 2025

SPONSORED CONTENT

Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

April 25, 2025
Outsourcing: Getting to Go/No-Go

Outsourcing: Getting to Go/No-Go

April 5, 2025
Six Payments Trends Driving the Future of Transactions

Six Payments Trends Driving the Future of Transactions

March 15, 2025
AI for Banks: A Starter Guide for Community and Regional Institutions

AI for Banks: A Starter Guide for Community and Regional Institutions

March 1, 2025

PODCASTS

Podcast: Accelerating banking for quick-service restaurants

May 8, 2025

How a Georgia community bank supports government-guaranteed lending nationwide

May 1, 2025

Podcast: Quantum computing’s shakeup in payments, cybersecurity

April 24, 2025
ADVERTISEMENT

American Bankers Association
1333 New Hampshire Ave NW
Washington, DC 20036
1-800-BANKERS (800-226-5377)
www.aba.com
About ABA
Privacy Policy
Contact ABA

ABA Banking Journal
About ABA Banking Journal
Media Kit
Advertising
Subscribe

© 2025 American Bankers Association. All rights reserved.

No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive

© 2025 American Bankers Association. All rights reserved.