In a managed economy, terrible housing data is bullish for home prices

This may be pointing to crisis, but not for existing home owners

Note: Much of this data does not reflect the recent sharp +50 basis point drop in mortgage rates, so we will have to wait until further data come out to see how the new home data has been affected. This release was delayed by the government shutdown.

Housing starts fall further below Freddie Mac’s theorized market equilibrium rate of 1.35-1.6 million annual starts.

Housing starts proved unexpectedly weak in December and will pull back residential investment in Thursday’s GDP report. A strong offset, however, is steady strength in permits which are less impacted by weather or similar one-time effects.

Starts fell 11.2 percent in the month to a 1.078 million rate, which was far below consensus range. This compares with a long trend in the 1.200 to 1.300 million range and is the weakest showing since September 2016. Keep in mind that the longer-term trend is still below the rate with what Freddie Mac considers to be supply/demand equilibrium.

The supposed good news was that permits rose 0.3 percent in December to a 1.326 million rate. That rate is still too low for helping to build supply.

In a managed economy there is no such thing as market equilibrium

As soon as the housing starts data were released this morning, the CNBC shills were in high gear, trying to understand why the numbers were so weak in December. Of course, the data has been delayed in the wake of the government “shutdown,” but it is clear that higher interest rates were taking out rising secular demand.

I have to believe the U.S. Fed had some idea about the anecdotal evidence in real time. This was probably one of the reasons for their change of policy statement.

But the CNBC experts were at a loss to explain why the numbers continue to sink. They theorized that millennials are less interested in buying houses. But we know the answer. Government restrictions on zoning and especially access to credit has tremendously impacted prospective home buying.

While rates are low by historic standards, obtaining a mortgage is still difficult. Since the federal government has assumed effective control of the mortgage market, virtually all owner-occupied mortgage underwriting is guided by the strict guidelines of Fannie Mae and Freddie Mac.  There really is no sliding scale for mortgage origination anymore. In order to buy a house, home buyers need to conform to strict federal guidleines. Even hard money lenders have begun to conform to federal underwriting restrictions.

There is a lot of demand, but many potential home owners are now permanently shut out.

The bottom line; the grim numbers will do little to drop home prices. In fact, I see the opposite. In a managed economy, supply is always restricted, prices continue to stay at permanently elevated levels, and existing home owners like it that way. If you are not part of the home owners club, good luck.