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By New_Deal_democrat December 19, 2013 6:35 am
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Rising interest rates will negatively impact US housing in 2014
One disagrees with Bill McBride a/k/a Calculated Risk a/k/a The Nicest Blogger On The Internet at one's peril, especially when it comes to housing, but that is what I am about to do.

Bill (link: http://www.calculatedriskblog.com/2013/12/update-looking-for-stronger-ec...) has written that he is looking for stronger economic growth in 2014 in part because he expects that "the housing recovery should continue."  Unless the interest rate spike that began in April 2013 abates, I disagree that the housing recovery will continue, and that will have a negative effect on growth rates by the end of 2014.

Below I have plotted the YoY changes in housing permits vs. the YoY percent change in 10 year treasury bonds for the last 60+ years.  Both are averaged quarterly to distill signal from noise.  Treasury yields are inverted so that a rise in yields is shown as a decline.

First, here the period from 1962 to 1984:  Permits are in blue, scaled so that 1=200,000 houses.  Treasuries are in red:

Next, here is 1984 to the present.  Permits are scaled at 1=100,000 houses.

Note that the two series move largely in sync.  Specifically, a rise in 1% in interest rates YoY almost always leads to a decline of 100,000 or more housing permits a year, with usually no more than a 6 month lag.  The only 3 exceptions are in 1968, for a short period between between the two parts of the "double dip" 1980 and 1981 recessions, and during the 2004-05 blowoff phase of the housing bubble.  Further, only twice in the last 50 years have interest rates risen by over 2% YoY without a recession following.

Finally, here is a close-up of the last 18 months:


Interest rates have backed up by 1% or more for the last 7 months.  Permits, which had been growing by as much as 250,000 YoY, have decelerated to as little as as 50,000 YoY (yesterday's report showed a little over 100,000 YoY).  If the typcial past pattern is followed, we will shortly see permits running 100,000 less than one year previously.

Note than, at present, the increase in interest rates has not gone far enough for long enough to justify a recession call, and I would expect housing permits to fall by at least 175,000 from their peak before it would be consistent with an actual decline in the economy.

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