The days of easy money aren’t over yet.
By Joshua Steiner and Robert Belsky, Hedgeye
FORTUNE — One of the few beneficiaries of President Obama’s re-election in the financial services landscape is housing. Here are three main reasons why:
•Rates. President Obama and Bernanke are synonymous, which means a continuation of easy monetary policy and pressure on the long end of the yield curve. This downward pressure continues to push mortgage rates to new record lows, an obvious boost for housing affordability.
•Policy. President Obama’s administration has been generally supportive of the housing market through various government initiatives. While we’ve been critical of the efficacy of many of these programs over the last few years, the reality is that they’ve had some beneficial effect. A continuation of the status quo in this regard is, on the margin, positive.
•Mortgage Interest. One of the principal threats to the housing market from the outcome of the election was a potential change to the tax code negatively impacting the mortgage interest deduction. Governor Romney, while never advocating explicitly for an elimination of the mortgage interest deduction, was a fierce proponent of an overhaul of the tax code. Most informed observers agree that any meaningful overhaul of the tax code had to include some change to the mortgage deduction, as it costs the treasury between $100-150 billion in tax revenue per year. With Romney’s defeat last night, potential risks to this deduction have been reduced, on the margin.
We often remind investors that housing is highly autocorrelated. Strength in prices will feed back into strengthening demand, which will further reinforce prices. The chief risk to the housing recovery at this point is a recession brought on by a stalemate over the fiscal cliff. Absent that, we see some longer-term structural risks to the current state of the housing finance system, but think these are unlikely to derail the strengthening recovery presently underway.
While Obama’s reelection is overall positive for the housing market, there is one significant caveat: The risk of economic slowdown from a stalemate over the the fiscal cliff. We’ll see whether such a close race has incentivized either the President or the Congress to be more willing to compromise. Based on the last four years, however, call us skeptical. We think the odds are good that a major showdown is coming, and the precedent of May 2011 augurs poorly for the outlook for the market.
Below we take a look at the last two weeks of mortgage volume data. In a nutshell, volume was down both for purchase and refinancing, but the decline was at least partially, and potentially entirely, attributable to Hurricane Sandy. We’ll watch the data over the coming weeks for a bounce.
Mortgage Application Data
Last week MBA Mortgage Purchase Applications fell 4.8% to an index level of 171.3. Meanwhile, refinance applications fell 5.0%, which represents the fifth consecutive week of decline. Over the same time frame, mortgage rates rose nominally.
Our Take: Last week’s data was clearly impacted by Hurricane Sandy. The MBA’s Vice president of research gave a little color about what the impact was in the affected regions, noting:
“Last week’s storm had a significant impact on application volumes on the East Coast. Applications fell more than 60 percent compared to the prior week in New Jersey, almost 50 percent in New York and nearly 40 percent in Connecticut. Other East Coast states also saw declines over the week, while many states in other parts of the country had increases in application volumes.”
Overall, purchase application data has been generally moving sideways in 2012 vs. 2011. Moreover, the trend line of purchase application year-over-year growth has had a positive slope to it for the last four years, auguring positively from a longer-term stability standpoint.