Are rising interest rates eroding demand momentum?

It's really tough to do the math, because cause-and-effect doesn't come purely into play, and even correlations are hard to prove, because multiple variables always work as forces.

As Wells Fargo analyst Steve East puts it, as interest rates go up as they're going to do, what happens to demand is virtually a no-win for the public builders. Either way they get hit with negative investor sentiment. He explains this way:

We believe investor attention will focus intently on demand trends post-election, given the sharp rise in mortgage rates. Importantly, we expect heightened sensitivity to Order cadence through the quarter and month-to-date in January, given the quickly approaching spring selling season. We expect any whiff of negative demand trends from the increase in rates will weigh on the equities. We believe the sell first, ask questions later, mentality, will be omnipresent this quarter. Moreover, should Orders meet expectations, we believe skepticism likely abounds over the impact “fence sitters” pulling forward demand and what is a sustainable pace of demand moving forward into the spring.

Although there's historical proof that high-rates don't stop buyers who're determined to buy--take the 1980s, for example--there's lots of anxiety. "Historically low" has been where interest rates have sat for so long that it's hard to remember any other condition.

National Association of Home Builders economist Michael Neal explores that the speed of the spike in interest rates during the last few months of 2016 may have played a role in new home sales tallies, zeroing in particularly on a 10.4% decline in December's new home sales. He writes:

"For the bulk of monthly mortgage rate increases, those between the 40th and 80th percentile, the median decline in sales is less than 1.0 percent, about flat. However, a monthly rate change exceeding 10 basis points correlates, in aggregate, with a more noticeable, albeit still small, decline in sales."

Here's Neal's point supporting Steve East's contention that rising rates spell a hit on demand, whether or not it's immediate.

"The impact of monthly changes in rates may be stronger on subsequent months, or even previous months, than in the current month. For example, buyers anticipating rapid rate increases may decide to purchase a new home now."

Neal's take-away is that, across 40-plus years of housing data history, the direct correlation between interest rate increases and lower sales has been relatively benign. Zelman & Associates predicts that the need to climb the wall of worry on rates won't continue for much longer. Here, in the latest Z Report.

"We expect deceleration in [sales] growth rates in early 2017 versus the ending point in 2016, although we acknowledge that the tug-of-war between higher mortgage rates and elevated consumer confidence is unlikely to be fully settled until February or March."

Indeed, here we are in February, with the countdown to Spring Selling season in its final frame after Sunday's Super Bowl--or maybe home shoppers will skip the Game after all--and, already Consumer Confidence is coming off its lofty peak.

The Conference Board said Tuesday consumer confidence fell to a reading of 111.8 in January after hitting a 15-year high of 113.3 in December. The reading was a bit below the MarketWatch-compiled consensus of 112.9.

Consumers’ appraisal of the present improved, to a reading of 129.7 from 123.5, but the expectations index fell to 99.8 from 106.4.

The proportion expecting more jobs in the months ahead decreased from 21.7% to 19.8%, and the percentage of consumers expecting their incomes to increase declined from 21.5% to 18%.

The biggest 2017 risk to builders' sales volumes and inventory-turn plans--especially with their concerted push into new communities aimed at entry-level price tier buyers--is their monthly payment value proposition, and their capacity to deliver completed homes predictably on schedule and budget.

There's no overstating the importance of operational excellence when momentum and consumer psyche are in flux.