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Rising Interest Rates Put The Brakes On The Housing Industry

Written by Tim Morral
Published: 10/29/2013

Higher interest rates are contributing to a slowdown in orders for new homes after seven consecutive quarters of strong earnings.

Over the past few years, the housing market has experienced steady demand for new homes. As consumers emerged from the recession, they once again began to place orders for new homes, much to the relief of homebuilders across the nation.

Housing Industry - Growing or Shrinking?

But after nearly two years of sustained growth, there are signs that the new housing market is slowing down. Recently, Reuters' Sagarika Jaisinghani reported that orders for new homes are falling off, with the Dow Jones Home Construction (DJUSHB) Index decreasing by a fifth of its value since May. This followed a year-over-year period in which the DJUSHB almost doubled in value.

"There are a lot of headwinds this time, and we're going to see that come through in new orders," said David Williams, president of Williams Financial Group, a Dallas-based brokerage firm.

Factors behind the slowdown in new orders include:

  • Interest Rates. In May, interest rates began to rise to a two-year high, causing some consumers to think twice before making the decision to build.
  • Land Shortages. Previous housing crises drove many land developers out of the industry and have created a shortage of building lots in the current marketplace. In some cases, remaining developers are having trouble getting business loans from banks.
  • California. Large, California-based homebuilders led the earliest stages of the housing recovery, leading many to believe that the California housing market is due for a slowdown. "Even though it's very good in the beginning stage of the cycle, we're really concerned with people that have too much exposure there," added Williams.

It's hard to tell whether the slowdown in new home orders is only a temporary correction or marks the beginning of a long-term trend. But for small business owners, many of whom depend on new home construction, the best advice is to remain flexible and see which way the wind is blowing in the regional marketplace before making any major business decisions.

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