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By New_Deal_democrat December 3, 2016 2:01 pm
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Whither housing in 2017?

This has been a heckuva year for interest rates, which made in some cases new all-time lows in July, only to see 10 year US treasuries rise more than 1% off that bottom intraday this past week.

If anything, interest rates are the longest of long leading indicators, because they affect housing so acutely.  Because of that, we can already make an educated guess about the economy in 2017.

First, let's look at interest rates and private residential construction. Residential construction tends to lag the more noisy measure of housing permits by about 3 months or so:  

But they are useful precisely because they are much less noisy.

Now let's compare mortgage interest rates averaged monthly with residential construction, measured YoY, first in the 1990s, and then since the bottom of the last recession:

Note that generally the YoY change in residential construction tends to follow interest rates by about 9-12 months.  That isn't uniformly the case of course. During the housing bubble, when "everybody knows house prices only go UP!" construction boomed even though interest rates were rising slowly. Conversely during the ensuing bust, construction cratered even though interest rates were lower:

Now let's compare interest rates averaged monthly with the noisier housing permits (excluding NY due to the 2015 distoritions) series, again during the 1990s, and since the great recession, measured YoY:


Permits tend to follow interest rates with a shorter lag, averaging about 6 months - but with as previously noted much more noise.

Now let's look at the same graphs for the last several year, showing interest rates on a weekly rather than monthly basis, to best pick up the recent spike in rates:

Vs. construction:

Vs. permits:

Permits recently picked up, and are being followed just now by residential construction.  We should expect the post-Brexit lows to feed through to maximum YoY improvement in permits in the next 1 -3 months, followed by YoY improvement in residential construction next spring.

*IF* the current spike continues a little while longer, housing permits should be flattening out by midyear 2017, with residential construction following next autumn.

Note that even with the "taper tantrum" of 2013, when the 10 year treasury yield went up slightly above 3%, 2014 housing went flat rather than into actual decline.  The highest we've hit so far since the Presidential election on the 10 year treasury is 2.49% intraday. Which means, so far, there is no indication of an outright downturn at any point next year.

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