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By New_Deal_democrat December 29, 2016 10:19 am
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Housing at year end 2016

<div style="color: rgb(0, 0, 0); font-family: UICTFontTextStyleBody; font-size: 17px; line-height: normal;">Let's take a look at the very important leading sector of housing at the end of 2016.<br />
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As per usual, my polestar is that housing first and foremost reacts to interest rates. &nbsp;Secondarily, housing responds to demographics. While housing does respond to price levels, the history is that prices continue to rise or fall after interest rates increase or decrease, and even continue to rise/fall after sales turn. &nbsp;In other words, while price levels are certainly a causal element in sales, it takes awhile for buyers and sellers to "get the message" and react to a change in the market.<br />
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2016 saw two important and contrary trends in interest rates. &nbsp;These had been gradually declining since the beginning of 2014, with the decline climaxing with new lifetime lows in the wake of the flight to safety to US Treasuries following the shocking Brexit vote. &nbsp;Then, immediately following the equally shocking US presidential election, interest rates spiked, setting new 24 month highs:<br />
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<img alt="" class="image-large" height="192" src="/s3/files/styles/large/s3/image_877.jpg?itok=kzCXusBO" width="480" /><br />
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Although mortgage applications have not yet turned negative YoY, they peaked in June. New applications were only 1% above last December's levels as of the last report:<br />
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<img alt="" class="image-large" height="306" src="/s3/files/styles/large/s3/image_880.jpg?itok=smBVTxiI" width="480" />&nbsp;<br />
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And refinancing is for all intents and purposes dead in the water, falling all the way down to near post-recession lows:<br />
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<img alt="" class="image-large" height="307" src="/s3/files/styles/large/s3/image_881.jpg?itok=6u2_dBeq" width="480" /><br />
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(Both graphs courtesy Calculated Risk,&nbsp;http://www.calculatedriskblog.com)</div>

<div style="color: rgb(0, 0, 0); font-family: UICTFontTextStyleBody; font-size: 17px; line-height: normal;"><br />
Meanwhile, housing permits typically follow interest rates with a lag of roughly 6 months, as in the historical graph below:<br />
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<img alt="" class="image-large" height="192" src="/s3/files/styles/large/s3/image_878.jpg?itok=PUmy8Mdy" width="480" /><br />
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Permits have followed this typical pattern, as YoY comparisons continue to improve in reaction to the Brexit lows:<br />
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<img alt="" class="image-large" height="193" src="/s3/files/styles/large/s3/image_879.jpg?itok=YEQlNO9Q" width="480" /><br />
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Other long leading indicators from the housing market, including new home sales and real residential construction spending, continue to manifest an improving trend.<br />
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If long term history is any guide permits are near or at their turning point. At some time between now and late next spring, we should expect to see a deceleration in permit increases, which means a decline in YoY growth.&nbsp;<br />
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Since there remains pent-up demand from the large Millennial generation, and since rates have not yet surpassed their "taper tantrum" early 2014 highs, I do not see an actual downturn yet.<br />
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All of which means that we should continue to see increases in house prices, as shown for example by the Case Shiller index below:<br />
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<img alt="" class="image-large" height="194" src="/s3/files/styles/large/s3/image_882.jpg?itok=CnlLiGA2" width="480" /><br />
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Because the economy as a whole lags housing, and housing had a good 2016, I expect the economy to do pretty well for at least most of 2017.<br />
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