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Confidence matters more than mortgage rates in housing, and confidence just took a hit

Key Points
  • Mortgage rates have been falling sharply over the last three months, which should be incredibly positive for the housing market, but so far reaction has been muted in both home sales and new home constructio
  • The average rate on the 30-year fixed is now well below 4%; it was above 5% just last November. The drop in rates has not produced a home-buying spree for either new or existing homes.
  • "The further drop in mortgage rates did nothing to encourage people to buy, as there was no change in intentions to buy a home, and instead there was a 9 point jump in those that said it's a good time to sell a house—the most since 1992 when this question was first asked," noted Peter Boockvar of chief investment officer at Bleakley Advisory Group and a CNBC contributor.

Mortgage rates have been falling sharply over the last three months, which should be a major positive for the housing market, but so far reaction has been muted in both home sales and new home construction.

The CEO of a major U.S. homebuilder says it's all about confidence.

"I've always maintained over the years that consumer confidence means more than rates to the home buying decision," said Jeff Mezger, CEO of Los Angeles, CA-based KB Home. "We've had some great years where interest rates were 8, 9,10%—because people find a way when they feel confident about the future."

But consumer confidence fell sharply in August, according to a just-released report from the University of Michigan. The report said consumers felt they needed to be cautious about spending in anticipation of a potential recession. That bled into housing.

"The further drop in mortgage rates did nothing to encourage people to buy, as there was no change in intentions to buy a home, and instead there was a 9 point jump in those that said it's a good time to sell a house—the most since 1992 when this question was first asked," noted Peter Boockvar of chief investment officer at Bleakley Advisory Group and a CNBC contributor. "Again, refi's have been the main beneficiary of the cut in rates."

The average rate on the 30-year fixed is now well below 4%; it was above 5% just last November. The drop in rates has not produced a great home-buying spree for either new or existing homes. Part of that is because home prices are very high and affordability is at a 10-year low. In addition, there is very little supply of homes for sale, especially at the low end of the market.

Just last month, consumer confidence in home buying hit a new high, according to a monthly Fannie Mae survey.

"Consumers appear to have shaken off a winter slump in sentiment amid strong income gains. Therefore, sentiment is positioned to take advantage of any supply that comes to market, particularly in the affordable category," said Doug Duncan, Senior Vice President and Chief Economist.

He added this caveat: "However, recent financial market events following when the survey data were collected could weigh on consumer views looking ahead."

Lower mortgage rates have done little to encourage homebuilders either. Builder confidence moved just one point higher in August on the National Association of Home Builders' monthly sentiment index (HMI), but it has held pretty steady for the past several months, despite falling rates. Housing starts in the first seven months of this year are lower compared with a year ago, as builders continue to battle high costs for land and labor and regulations.

"Frankly, as an industry, that's what is holding us back from getting to normalized levels," said Mezger. "We're only going to invest and build if we can get a return, and it's difficult to find the combination of land, the cost to produce, the fee structure in that city and then what you can sell a home for based on the incomes in that submarket. So that is the challenge."

KB Home uses a build-to-order strategy, where buyers can take a base model, offered at the local median price point, and add what they like before construction. This is designed to help with affordability.

Builders overall, however, are still operating well below historical volume levels and well below current demand.

"This week's flare-up, with bond markets flashing recession warnings, does not provide fertile ground for new housing investment," said Matthew Speakman, an economist with Zillow. "Consumers stand ready to snap up new homes, particularly at the entry level, and mortgage rates are cooperating -- but new construction is not."

Single-family building permits were higher in July, but, again, that was before the volatility really hit the U.S. and global markets in August.