Housing slower growth but still a tailwind

We continue to see potential in the housing recovery despite the increase in mortgage rates.
Housing activity remains depressed compared with any longer term sustainable level and prices are not restrictive.
The pace of growth in both residential construction and house prices is set to slow. In our view, this will dampen the positive boost to GDP growth but housing will remain a significant tailwind for the recovery in 2014.

Slowdown but not the end of recovery

The housing recovery, which kicked off in 2011, showed impressive momentum late last year and early this year. Since then, the pace of expansion in both home sales and residential construction and house price increases have moderated significantly. One reason for the slowdown is the considerable increase in mortgage rates from May to September this year. We also believe there is some payback from the rapid increase in activity earlier this year, as this was fuelled at least partly by homebuyers fast forwarding their purchases in anticipation of higher funding rates in the future.

We do not believe the current slowdown is the end of the housing recovery. Fundamentals support continued positive growth in residential construction and the negative impact of the rapid increase in mortgage rates earlier this year should soon start to fade. In particular, since the peak in September, mortgage rates have declined 40bp, which has helped to ease financial conditions. On top of this, the latest Federal Reserve Senior Loan Officer Survey shows that banks continued to ease lending standards for prime homebuyers in the three months to October.

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