Strong mortgage applications

We're seeing important stirrings of life in a market that has experienced little or no growth for the past six years.

As the chart above shows, new applications for mortgages (not including refinancing applications) last week and the week before were up over 35% relative to their average in the second half of last year. If we ignore the one-time jump in applications in late September—which was an artifact of major changes to banks' reporting requirements—mortgage applications last week were higher than at any time since mid-2010.

As the chart above shows, the total amount of mortgage debt outstanding in the U.S. has been declining since 2008, but looks to have bottomed. (This chart only covers data through June '15.) Outstanding mortgage debt today totals some $9.5 trillion, and has not grown at all for the past 9 years.

The chart above shows the total amount of mortgages that have been securitized, roughly $5.1 trillion. After about four years of zero growth, from late 2009 to late 2013, securitized mortgages have increased by almost 10% in the past two years.

I think it's safe to conclude that the demand for mortgage loans is once again on the rise after many years of weakness, and the financial markets have accommodated that demand by lending more. Homeowners are now more willing to borrow, and lenders are more willing to lend.

As the chart above shows, residential construction spending has increased 17% in the year ended last October. Builders are responding to the rising demand for homes (nationwide prices are up about 30% in the past four years, according to Case-Shiller) and the rising demand for new mortgages.

Housing starts have been rising for the past five years, and show no sign of slowing. Builders are building more because homes are selling. It's quite likely that housing starts continue to rise for the foreseeable future, given ongoing growth in new home formations and the need to catch up for years of very weak construction activity.

10-yr Treasury yields are the major determinant of mortgage rates, and both bottomed in late 2012. We may now be living through the early stages of a reversal of the declining trend long-term interest rates which began in 1981. 30-yr fixed rate conforming mortgages are now going for 3.84%, up almost half a point from their all-time low at the end of 2012. Strong loan demand may in part be fueled by a "get it now before rates go higher" mentality, but it may also be fueled by increased confidence and prosperity on the part of homebuyers. Plus, there are almost 5 million more jobs in the economy today than there were when the housing market last peaked.

It's no secret that markets are worried about slow growth in China, collapsing oil prices, generally weak commodity prices, and the impending "lift-off" of short-term interest rates about to be engineered by the Fed. However, the budding strength of mortgage loan demand and the ongoing rise in construction activity in both the residential and nonresidential markets constitute a substantial and arguably overlooked counterweight to the weakness in other areas of the economy. Expect economic growth to continue in the 2 - 2 1/2% range we've seen for the past several years.