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Mortgage Rates Hit 4-Year High: Will it Foil Housing?

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The uptrend in mortgage rates continued for the ninth straight week during the week ended Mar 8. According to Freddie Mac’s latest Primary Mortgage Market Survey, the 30-year rate rose 3 basis points to 4.46%, marking the highest point since 2014. The result was greater affordability pressure at the start of the traditional spring home buying season. In the year-ago period, it averaged 4.21%.

Meanwhile, total mortgage application volume remained essentially flat last week, up just 0.3% on a seasonally adjusted basis, according to data from the Mortgage Bankers Association (MBA). Volume was 5% lower than the same week, a year ago.

Mortgage applications for buying a home, which are rate-sensitive, did not move much with the start of usually busy spring market. This was perhaps due to market concerns over President Donald Trump’s trade tariffs.

Tariff of 25% and 10% on imported steel and aluminum, respectively, were pronounced by Trump yesterday, as promised. These followed Trump’s first tariff between 3% and 24% on five Canadian lumber companies, in April 2017. The tariffs were in response to Canada's restrictions on the import of U.S. dairy products. Lumber prices have gained since then and now homebuilders are expecting higher steel costs.

Will Affordability Take a Toll on Housing?

Construction accounted for 43% of all steel shipments in the United States, according to the American Iron and Steel Institute. The tariffs, and the much-expected rise in the price of raw materials, come at a time when the country faces an acute affordable housing shortage.

Inventory constraints are already pushing prices higher, thereby affecting affordability. The affordability index for first-time buyers fell to 103.8 in 2017 from 110.1 in 2016, as per the latest report from National Association of Realtor. Pending home sales fell 4.7% to 104.6 in January, per the latest report from National Association of Realtors or NAR. Investors should note that NAR’s index of pending home sales tracks real-estate transactions in which a contract has been signed, but the transaction hasn’t closed.

Limited supply of homes for sale has been the biggest issue facing the market and the problem will continue, particularly at the entry-level market. Total housing inventory at January end for existing homes available for sale is still 9.5% lower than a year ago and has fallen year over year for 32 consecutive months.

Limited land availability is driving prices higher, as median sales price of a new home jumped 2.4% year over year last month. The median house price increased 5.8% for existing homes from a year ago and marked the 71st consecutive month of year-on-year price gain. This has to some extent restricted first-time buyers to enter the market as they comprised 29% of sales in January, down from 32% in December 2017 and 33% a year ago.

Apart from supply constraints, higher mortgage rates appear to be weighing on home sales, since buyers are facing higher borrowing costs. Sales of newly constructed homes, accounting for roughly 10% of all U.S. home sales, fell 7.8% in January from the prior month and 1% from the year-ago period to a seasonally adjusted annual rate of 593,000 units, as per the latest report from the Commerce Department. Notably, January’s figure is the lowest since August 2017.

Additionally, higher mortgage rates are expected to pose serious threats to the construction industry, with higher expected input costs at a time when political pundits are seriously considering a national infrastructure revamp. Earlier this year, President Trump unveiled a massive $1.5-trillion plan to modernize America’s infrastructure. The plan incorporates $200 billion in federal funding to promote state, local and private investments and maximize the value of every taxpayer dollar.

Indeed, President Trump’s plan to double economic growth through an ambitious stimulus program featuring tax cuts, deregulation and higher infrastructure spending bodes well for the construction sector. But a potential lineup of interest rate hikes, growing labor shortage, limited land availability, higher material costs and a constrained mortgage environment are significant headwinds.

Construction Sector’s Stand

The implications of the metal tariffs and mortgage hike are yet to be felt in a sector that has been in the top spot since last week. Currently, top-performing construction stocks, i.e. stocks sporting a Zacks Rank #1 (Strong Buy), which are cashing in positive fundamentals include Boise Cascade Company (BCC - Free Report) , Continental Building Products, Inc. , EMCOR Group, Inc. (EME - Free Report) , Fluor Corporation (FLR - Free Report) , Louisiana-Pacific Corporation (LPX - Free Report) , PotlatchDeltic Corporation (PCH - Free Report) and Primoris Services Corporation (PRIM - Free Report) . You can see the complete list of today’s Zacks #1 Rank stocks here.

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