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By New_Deal_democrat January 19, 2015 10:26 am
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Interest rates are bullish for the housing market later this year (and the US economy next year)

The global slowdown has caused US interest rates to plummet along with gasoline prices.  While the decline in interest rates reflects concern about weakness and deflation now, it also sets the stage for a rebound later -- hence why interest rates are a long leading indicator.

One of the corollaries of lower interest rates generally, is lower mortgage rates.  And as I have written many times over the last several years, a significant change in interest rates leads to a significant change in new housing construction (and refinancing).  New housing construction in turn over the next year or so feeds into the general economy.

So the downturn in interest rates over the last year, and especially the last several months, has been accompanied by a nice decline in mortgage rates, and this is turning me very bullish on housing for later this year.

First, here is the YoY% change in Treasury rates and mortgage rates (inverted), compared with the YoY change in housing permits (in 100,000s) over the last 5 years:

You can see that new housing permits follow changes in interest rates with a 6 to 12 month lag.  Additionally, the large Millennial generation reaching home-buying age is providing a demographic tailwind on the order of about 75,000 - 100,000 annually. 

Here's the same information zoomed in to the last year:

Treasury interest rates are now 1% lower than they were a year ago, and mortgage rates are declining in tandem.  If this decline in rates holds for awhile, it suggests that housing permits will rise by about 100,000 annualized later this year.  The demographic tailwind means that could go as high as an improvement of 200,000 YoY.

In summary, unless interest rates  reverse higher in short order, I'm turning more bullish on housing later this year, and this begins to have favorable implications for the broader economy in 2016.

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