The inverted yield curve may be odd, and negative yields in Europe may be strange, but the weirdest current perversion of markets (or is it the “new normal”?) is in Denmark specifically. That oddity is the negative rate mortgage. Yes, homebuyers are getting paid to take out mortgages to buy a home. Jyske Bank, Denmark’s third largest lender, is offering a mortgage rate of -.50% before fees.
FINSUM: So this is already happening in Europe, but it may have limited effects given the continent’s demographic struggles. It is hard to imagine this happening in the US, but if it did, we bet it would cause a housing boom.
More data has been just released on the US real estate market, and more disappointment. While the market should be rebounding because of the big fall in mortgage rates, the opposite seems to be happening. New home construction fell by the most in five months in July. Housing starts fell 4% despite lower mortgage rates. The fall came despite expectations for growth, and June numbers were also revised downward. An economist at Zillow summarized the situation this way, saying “Scarce land and high labour costs have plagued builders for much of the year, factors that have been exacerbated by unrelenting uncertainty in the global markets … This week’s flare-up, with bond markets flashing recession warnings, does not provide fertile ground for new housing investment”.
FINSUM: The market seems to be perpetually slowing, but it has not reversed outright despite over a year of weak data. Time has proved that real estate seems a little disconnected from the rest of the economy right now; in other words, it does not seem to be an indicator of much.
Something discouraging is happening to the US real estate market. Home prices and sales are continuing to be weak despite a huge drop in mortgage rates. Lower mortgage rates should have given a boost to new home sales and construction, but the opposite has occurred. Home price gains and sales have slipped considerably and permits for new construction have fallen 6.6% in 15 months.
FINSUM: The question, as ever, is whether the weakness in housing is presaging an economy-wide recession, or is just an isolated situation. We favor the latter.
So the Fed is widely expected to cut interest rates this week, which has sent market yields tumbling over the last several weeks. However, guess what, mortgage rates were falling steeply well before this telegraphed cut. 30-year mortgage rates have fallen from just under 5% in November of last year to just 3.75% now. What is most interesting here, and most worrying, is that other consumer lending rates did not fall similarly. For instance, auto loan rates, variable credit card rates, and home equity line of credit rates have not changed nearly as much as mortgages, signaling something unique about the market.
FINSUM: We find this to be a sign of market weakness that was more driven by the economy itself than it was the Fed.
It has been years since there was much good news in US real estate. The market has been slightly pessimistic for years, but finally there might be some reason for optimism. New home sales actually rose in June, a sign that health is improving in the all-important US property sector. Sales increased 7% from May, but the average home price stayed flat from one year ago at $310,400.
FINSUM: With rates likely to fall and yields having already tumbled, it would not be surprising to see a short-term pop in real estate. It would actually be quite worrying if that doesn’t happen.