Sooner or later, higher mortgage rates (which are keyed off of the 10-year treasury yield) were always bound to start slowing the housing market. It was more a matter of what level of rates would be necessary to take the first bites out of housing. We think the answer is playing out right in front of us. With mortgage rates recently breaching the highest level since 2011, housing data has been coming in on the weak side all year long, and may be set to get even worse in the coming months. Let’s explain.
The home builders seem to have caught on, as we would expect. In the next chart we show the 1 year change in private residential construction including improvements (blue line, left axis) compared to the 30 year fixed mortgage rate (red line, right axis, inverted, leading by 2 quarters). As rates have moved higher this year, new home construction growth has slowed to just 2.5% Y0Y. If rates are any indication, new home construction growth may turn negative in the months just ahead.