Wage growth also likely remains too high to be consistent with 2% inflation over the long run, which the ESR Group believes will keep monetary policy tight.
Fannie Mae maintains its baseline call for a recession to occur – forecasting it to begin in the first half of 2024. In its July ESR note, Fannie Mae projected a modest recession beginning in Q4 2023 or Q1 2024.
The group upgraded its 2023 real GDP growth outlook to 1.9% from 1.1% on a Q4/Q4 basis and revised its 2024 GDP growth prediction to a 0.2% decline from 0.1% previously, reflecting a recession hitting later than was initially anticipated.
Subdued home sales
Regardless of whether a soft landing is achieved over the coming year, Fannie Mae expects existing home sales to stay subdued and within a tight range.
“With an ongoing tight supply of existing homes for sale and the recent rise in the 30-year fixed-rate mortgage rate to around 7%, we expect home sales in 2023 to remain near the lowest annual level since 2009,” the group said.
Total existing home sales fell 2.2% in July from June to a seasonally adjusted annual rate of 4.07 million. Year-over-year, sales slumped 16.6% down from 4.88 million in July 2022, according to the National Association of Realtors.
“If a recession is avoided, then ongoing limited supply of homes for sale on the market combined with continued affordability constraints and the ongoing ‘lock-in’ effect, whereby existing owners do not want to give up their current low mortgage rates, is expected to lead to a low pace of sales,” according to the ESR group.
Rising mortgage rates will also exert more downward pressure on sales. However, given the already very low pace of sales, the majority of highly interest-rate-sensitive borrowers are already on the sidelines and current sales activity is being supported by less rate-sensitive buyers, Fannie Mae said.
In the case of a recession scenario, interest rates would likely pull back somewhat, lessening the lock-in effect thereby potentially boosting the number of homes available for sale.
However, in a recession, a weaker labor market, tighter credit, and lower consumer confidence would act as downward pressure on housing, Fannie Mae noted.
In contrast, new home sales and construction, while choppy in recent months, have generally been on an upswing.
Single-family housing starts jumped in July by 6.7% to a pace of 983,000 annualized units. This was 9.5% higher than a year prior, the first annual increase since April 2022.
However, based on permits being substantially lower at 930,000, Fannie Mae expects some pull-back in the near term, especially given the recent rise in mortgage rates.
Fanie Mae expects a modest pullback in construction due to a slowing economy, though a similar outcome may occur if instead a soft landing is accompanied by higher for longer mortgage rates leading to slower housing construction and sales.
“In fact, somewhat softer housing construction and sales may be needed to make a soft landing possible,” according to the ESR group.
Mortgage originations forecast little changed
The forecast for purchase origination volume in 2023 is largely unchanged at $1.3 trillion.
For 2024, the ESR group revised upward its forecast of purchase mortgage originations volumes by $25 billion to $1.5 trillion, consistent with upward revisions to the home sales forecast.
Refinance volumes are expected to be $261 billion in 2023 and $456 billion in 2024, representing downgrades of $4 billion and $9 billion, respectively, from the July projections.
“Builder sentiment has shown that higher mortgage rates are contributing to a decline in buyer traffic, and rates need to stabilize to prevent the housing market from slowing,” added Alicia Huey, chairman of the National Association of Home Builders (NAHB). While the combination of high-interest rates, high pricing, and limited inventory is likely to continue … [Read more…]
The Economy, Though Volatile, Has Shown Resilience in the Face of Rising Interest Rates
The housing market has also been impacted by high rates as millions of homeowners locked into previously low mortgage rates and are content to remain in their current homes, therefore helping to keep inventory low
The U.S. economy has been resilient in the face of rising interest rates and grew at its long-run average rate of 2% during the first quarter of 2023. The labor market remains strong with an unemployment rate below 4% and rising labor force participation for the 25–54-year-old age group. The housing market has also been impacted by high rates with millions of U.S. homeowners locked into previously low mortgage rates and content to remain in their current homes, helping to keep inventory low and the balance tilted in favor of home sellers over buyers in most markets. In this month’s spotlight we show that this “mortgage rate lockin effect” is the largest ever in U.S. history, and is likely to impact the housing market for years to come.
Recent developments in the U.S. economy
Per the U.S. Bureau of Economic Analysis, the third and final estimate of first quarter 2023 Real Gross Domestic Product (GDP) was much stronger than previously reported. Quarterly growth was revised up 0.7 percentage points to an annualized rate of 2%. While real GDP was revised upwards, the pace of growth continues to slow mainly due to the drag from the interest rate-sensitive sectors such as residential fixed investment and business investment. But the undaunted U.S. consumer has remained resilient, and consumer spending grew at an annualized rate of 4.2% in the first quarter, contributing to the upward revision of real GDP growth.
Consumer confidence and sentiment play a pivotal role in boosting consumer spending. The Conference Board’s June 2023 measure of consumer confidence jumped to the highest level since January 2022, reflecting improvements in the current conditions as well as in the future expectations. Expectations of inflation fell in June to 6%, the lowest reading since December 2020.
On the labor market side, according to the Bureau of Labor Statistics Employment Situation Summary for June 2023, the economy added 209,000 jobs in June led by the government, health care, social assistance, and construction sectors. The unemployment rate ticked down to 3.6% to remain near 50-year lows. The prime age (25–54-year-old) labor force participation rate has been rising and is now at the highest level since April 2002 (Exhibit 1). This suggests that the tight labor market is bringing many of the younger workforce, who were on the sidelines, back into the market.
The economy added 209K jobs in June, and the unemployment rate ticked down to 3.6% to remain near 50-year lows.
Inflation has been cooling in recent months, and the measure tracked by the Federal Reserve, the U.S. Bureau of Economic Analysis’ “core” price index for personal consumption expenditures, excluding food and energy (Core PCE), came in at 4.6% year-over-year in May. While housing continues to be the largest contributor to the increases in inflation and prices, it has started to cool off. Another inflation measure that the Federal Reserve has been tracking recently is the supercore service inflation (core services excluding energy and housing). Supercore inflation has been decreasing and the year-over-year change in May 2023 came in at the lowest since March 2022.
Inflation has been cooling in recent months, and the U.S. Bureau of Economic Analysis’ “core” price index for personal consumption expenditures came in at 4.6% year-over-year in May.
Recent developments in the U.S. housing market
The divergence between existing home sales and new home sales has grown wider in recent months. Existing home sales receded 20% from a year ago, while new home sales surprised on the upside and increased 20% from a year ago in May. The mortgage rate lock-in effect continues to impact the listings of existing homes, which are down 35% as of April 2023, compared to the pre-pandemic average between 2016-19 (Exhibit 3). Pending home sales, which are a forward-looking indicator for existing home sales, also declined during May and were down 2.7% over the month and 22.2% over the year according to the National Association of Realtors®.
On the other hand, according to the NAHB/Wells Fargo Housing Market Index builder confidence improved to the highest level in nearly a year due to continued housing demand and easing of supply chain issues, as well as the lower level of existing homes for sale. All three subcomponents of the HMI increased: the sales expectation component saw the greatest increase of 6 points to 62, current sales conditions increased 5 points to 61, and buyer traffic rose 4 points to 37.1 The current sales conditions and the sales expectations rose to levels above 60 for the first time in a year as homebuyers warm up to mortgage rates in the 6-7% range.
This increased builder confidence was also reflected in the housing starts, which jumped 21.7% in May. Furthermore, the monthly increase in total starts at 291,000 units was the highest in over three decades. Permits also increased over the month of May and were up 5.2% on a month-over-month basis, despite being down 12.7% year-over-year.
House prices may have bottomed and continue to firm up in the short run. Per the FHFA’s Purchase- Only House Price Index, house prices increased nationally 0.7% from March to April 2023. While house prices increased across all the divisions over the month of April—ranging from +0.1% in the Pacific division to +2.4% in the New England division—the variation is wider when we consider the house price appreciation as compared to a year ago. The 12-month changes ranged from -3.8% in the Pacific division to +6.1% in the East South-Central division.
Recent developments in the U.S. mortgage market
The 30-year fixed-rate mortgage as measured by our Primary Mortgage Market Survey®, settled at 6.7% in June, partly due to the Federal Reserve’s decision to pause increases in the Fed Funds Rate. Partially in response to the stabilization in mortgage rates, purchase applications increased 7.1% over the month of June, while refinance applications increased 2.8%, both after seasonal adjustment according to the Mortgage Bankers Association Weekly Applications Survey.
Delinquency rate went down 11 basis points in May to 3.1%, close to the historical low of 2.92%; foreclosure starts remain 41% below 2019 levels.
With respect to mortgage performance, the delinquency rate, as measured by loans 30 or more days past due went down 11 basis points in May to 3.1%, close to the historical low of 2.92%, according to Black Knight’s May Mortgage Monitor. Serious delinquent loans (90 or more days past due) also fell by 18,000 over the month and are down around 30% since May 2022. While foreclosure starts increased 2.2% over the month of May, they remain 41% below 2019 levels.
The outlook
The outlook remains volatile as we enter the second half of the year. The Federal Reserve’s pause on interest rate hikes after ten consecutive increases since March 2022 was a welcome breather for the economy. The labor market remains strong with low unemployment and inflation appears to be moderating. Downside risks as a slowing economy could tip into recession, but on balance our outlook is cautiously optimistic.
General economy, rates, inflation
The U.S. economy will continue to grow, unless consumers pause their spending. While the labor market is gradually moderating, it remains sufficiently tight, and combined with consumers’ excess savings and recent wage gains, consumers will continue to spend and the economy will continue to expand, although at a reduced pace.
While the labor market is gradually moderating, consumers will continue to spend, and the economy will continue to expand, although at a reduced pace.
Under our baseline scenario, we expect inflation to continue cooling as the long and variable lags of monetary policy work through the economy. The slowing growth in prices of goods and services will further reinforce consumers’ purchasing power. However, even though inflation is expected to slow it will be gradual and the pressure on long term rates including mortgage rates will not likely abate this year. Therefore, we expect mortgage rates to stay above 6% for the second half of 2023. High mortgage rates will increase the cost of owning a home, likely leading to a reduction in other spending. However, savings from cooling inflation could be enough to offset the increased housing costs. If this is the case, consumers will keep spending, and the economy will continue to grow unless the labor market further moderates significantly.
Home sales
On the housing front, home sales are plagued by a combination of a lack of inventory of existing homes and high mortgage rates. Due to the mortgage rate lock-in effect (described further below), many existing homeowners are unwilling to list their homes for sale, and we do not expect sufficient existing homes to come on the market any time soon to significantly boost existing home sales. Therefore, we expect existing home sales to remain low through the rest of 2023. However, new home sales are expected to pick up through the rest of the year. Although new home sales’ contribution to the total sales has been increasing in recent months, they are a fraction of the total home sales, we expect total home sales to remain muted for the rest of the year.
Home prices
Our official corporate forecast for the next 12 months has house prices falling by 2.9% and an additional 1.3% over the subsequent twelve months. However, given the current housing market conditions with historic low inventory and an early read on our data, we will likely revise our home price forecast in the next iteration of the Economic, Housing and Mortgage Market Outlook. We expect tight inventory will push sales volume down, and we expect it to keep home prices up.
Mortgage originations
Due to lower home sales, purchase origination volumes are expected to remain muted this year, while high mortgage rates keep refinance activity low. As homebuyers get accustomed to the new normal in terms of mortgage rates, we expect home sales to pick up and purchase originations to resume modest growth in 2024.
JULY 2023 SPOTLIGHT:
Mortgage rate lock-in and the housing market
The recent rapid increase in mortgage rates from historical lows to 20-year highs has created a scenario that we have not seen in more than 40 years. Because so many households have a fixed-rate mortgage, which exists in part because of financing from Freddie Mac and Fannie Mae, they were able to refinance into low interest rates in recent years. This contrasts with variable-rate mortgages, which have increased significantly as a result of rising mortgage rates. Nearly 6 out of 10 borrowers now have a mortgage rate at or below 4%. Given current market rates, many of those homeowners have locked in payment savings, but they also may have locked themselves into a forever home. Throughout this spotlight we use the term “mortgage rate lock-in effect” to refer to the ownership of a mortgage on favorable terms compared to current market interest rates.
Nearly 6 out of 10 borrowers now have a mortgage rate at or below 4%. While those homeowners have locked in payment savings, they also may have locked themselves into a forever home.
The mortgage rate lock-in effect is a benefit to homeowners with fixed-rate mortgages. To illustrate the benefit of the mortgage rate lock-in effect, suppose a lucky homeowner has refinanced their mortgage of $250,000 at 2.65% in January of 2021. Their current monthly principal and interest payment would be $1,007 and after 29 months of payment their current outstanding balance would be $236,379. If the borrower obtained a new 30-year mortgage of $236,379 at the prevailing market interest rate of 6.81%, their monthly payment would increase to over $1,500 a month.
Following Quigley2, we compute the net present value of the mortgage rate lock-in effect by taking the difference between the outstanding balance of the mortgage and the present value of the mortgage at prevailing market interest rates.3 The value of mortgage rate lock-in is $86,136 in our example.4
Except for certain limited cases, the mortgage is not portable or assumable. In today’s market, most mortgages have due-on-sale clauses, requiring the borrower to terminate the mortgage when they sell the property. To enjoy the benefit of the value of their low mortgage rate, the borrower must continue to live there, maintain it as second home, let it sit vacant or rent it out. In our example, the homeowner is only going to be willing to sell their current home, and thus give up their low mortgage rate, if the net benefit of a move is worth at least $86,136. For some households who are pursuing a new job opportunity or moving to be closer to family the move could be worth it, but others may opt to stay put.
The national average mortgage rate lock-in effect for 30-year and 15-year fixed rate loans is $55,000.
For each 30-year and 15-year fixed rate loan in Freddie Mac’s portfolio active as of June 2023, we computed the value of the mortgage rate lock-in effect.5 Per these calculations, the national average mortgage rate lock-in effect is $55,000 per household but because of differences in average loan sizes and the timing of originations and the history of refinance activity, the average value varies considerably across the country and by year of origination. Across geographies the average mortgage rate lock-in effect varies from a high of $91,000 in Hawaii to a low of $32,000 in West Virginia. Considering year of origination, the highest average values are for loans originated in 2020 and 2021 with average mortgage rate lock-in effect of $77,000 and $85,000, respectively. But, as rates continue to increase, even mortgages originated in 2023 have an average mortgage rate lock-in effect of $10,000.
To get a sense of how significant the mortgage rate lock-in effect is for the U.S. economy, we can sum the mortgage rate lock-in effect over the Freddie Mac portfolio. Considering only 30-year and 15-year fixed-rate mortgages financed by Freddie Mac, the aggregate mortgage rate lock-in effect for borrowers in Freddie Mac’s portfolio is substantial. We estimate that, considering the company’s single-family mortgage portfolio, homeowners with fixed-rate mortgages financed by Freddie Mac have locked in savings of a collective $700 billion dollars in total value. This is equal to about 25% of the outstanding unpaid principal balances in Freddie Mac’s single-family mortgage portfolio.
Our aggregate estimate of 25% of outstanding mortgage balances is significant and shows that many have truly benefitted from their fixed-rate mortgage when rates hit record lows. For comparison, Quigley calculated the average mortgage rate lock-in effect equal to $1,800 in 1981 for households with mortgages, which represented about 5% of outstanding mortgage balances versus about 25% today.6 In Exhibit 4 (on the following page) we show a time series of quarterly average mortgage rate lock-in effect in the Freddie Mac portfolio since 2018. From March 2019 through December 2021, the average lock-in effect was negative, meaning that the average borrower had significant incentive to refinance. But since March 2022, the average lock-in effect has surged, reaching over $50,000 in each
of the past four quarters.
The mortgage rate lock-in effect is already having a significant impact on the U.S. economy and will likely continue to do so for years to come. One of the major challenges to the current U.S. housing market is a lack of available-for-sale inventory. The lock-in effect is yet another layer contributing to the dearth of available inventory. How much so is an active area of research.
Footnotes
1 The Housing Market Index is a diffusion index normalized so that a value of 50 indicates sentiment balanced between positive and negative. Any value above (below) 50 indicates that on average survey respondents have a positive (negative) sentiment. For more information on the index see https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index.
2 Quigley, J.M., 1987. Interest rate variations, mortgage prepayments and household mobility. The Review of Economics and Statistics, pp.636-643.
3 The net present value of the mortgage rate lock-in effect is denoted by V and computed by using the value of the current mortgage balance (B) and the present discounted value of the payments (P) using prevailing market interest rates (r) discounted over the remaining (n) periods of the loan:
4 In our example, the borrower’s current balance B is $236,379, but the present value of the monthly payments (P=$1,007) discounted for the remaining (n=331) months at 0.005675 (r=6.81/1200) equals $150,243. Thus, the value V is $86,136 ($236,379-$150,243) which represents the value the borrower gets by having locked in a low mortgage interest rate.
5 Due to curtailment, or early payment of principal, our formula is slightly more complicated than the one presented above. To adjust for cases of curtailment we use the modified formula:
Where n is now the remaining months left adjusting for curtailment and F is the residual partial payment due in period n to pay off the remaining balance.
6 Per the 1981 American Housing Survey (https://www2.census.gov/prod2/ahsscan/h150-81a.pdf page 10 Table A-2) there were about 27 million households with a mortgage in the U.S. Multiplying $1,800 by 27 million gives us a little less than $50 billion in aggregate mortgage rate lock-in effect in 1981. Per the Financial Accounts of the United States, the total mortgage debt outstanding on 1-4 family housing was $1 trillion in 1981. $50 billion / $1,000 billion = 5%.
Completed homes fell 11.8% from the prior month and were 5.4% below the July 2022 level. The pace of single-family home completions picked up from the prior month, boosted by gains in the Midwest and West.
Meanwhile, there are just over one million multifamily units under construction, a record.
Still, it’s a good, not great report, economists said. Housing starts have been down for 13 of the last 15 months on a year over year basis. And the NAHB/Wells Fargo builder confidence index also fell in August, the first decline in 2023.
Declines in the current pace of sales and the next six months pushed the index down, said George Ratiu, chief economist at Keeping Current Matters.
In spite of the affordability challenges, homebuyers remain eager to buy. Developers and construction companies seem to “have come to terms with the affordability challenge and have been erecting smaller homes at more approachable prices this year,” said Ratiu.
Though there are near-term and medium-term challenges with mortgage rates and waning affordability, the fundamentals still look good, economists said.
“Higher mortgage rates threaten affordability and builder supply-side challenges remain, but the housing market remains fundamentally underbuilt and existing homeowners aren’t moving,” said Odeta Kushi, deputy chief economist at First American. “While builders can’t make existing homeowners move, they can add more new homes to the housing stock.”
Completions were down in July, but that is about one year after permits and starts began to decline, leaving fewer homes in the pipeline and thus dampening completions, said Nicole Bachaud, an economist at Zillow.
“New construction remains a vital source of new inventory in this market, with many builders still offering incentives that allow for more buyers to find opportunities in the new homes market, so continuing to build is important to the overall health of this market,” she said.
There are other challenges for prospective homebuyers to overcome, said Travis Hodges, a managing director at insurance brokerage VIU by HUB. It’s become much more difficult to secure homeowners insurance in several markets, and rising costs are a big concern.
“With insurance premiums expected to be up 7% this year on average, finding coverage at a reasonable price is key for new home buyers to carry a mortgage,” Hodges said.
States like California and Florida, which are both prone to extreme weather events, are now facing issues of multiple carriers leaving the market. A similar situation might happen in Maui after catastrophic wildfires destroyed parts of the island.
Today’s Fed Minutes were uneventful with a volume spike that didn’t even eclipse those seen after today’s 8:20am CME open or the 9:15am Industrial Production data. That puts them in very forgettable company among potential market movers. Nonetheless, bonds sold off moderately into the afternoon. This has less to do with things that happened today and more to do with the general trend. Inflation is moving into the ensemble cast while growth, issuance, and the yield curve are getting more lines.
Housing Starts
1.452m vs 1.448m f’cast, 1.434m prev
Building Permits
1.442m vs 1.463m f’cast, 1.441m prev
Industrial Production
1.0 vs 0.3 f’cast, -0.5 prev
10:12 AM
Weaker at 8:20am CME open, but stronger now. 10s down 1.6bps at 4.203 and MBS up 3 ticks (0.09).
11:49 AM
Giving up some ground now with MBS down 2 ticks (0.06) and 10yr yields up 1.4bps at 4.233.
01:35 PM
Weakest levels ahead of Fed Minutes. 10yr up 2.9bps at 4.248. MBS down an eighth (.125).
02:17 PM
Slightly weaker after Fed Minutes, but not a huge move. 10yr up 3.5bps at 4.254. MBS down 7 ticks (.22)
04:18 PM
More selling. 10yr up 5bps at 4.268 and MBS down just over a quarter point.
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U.S. homebuilder sentiment unexpectedly declined in August for the first time this year as high mortgage rates deterred prospective buyers.
The National Association of Home Builders/Wells Fargo gauge decreased six points to a three-month low of 50. The figure was below all estimates in a Bloomberg survey of economists.
Builder confidence had been on a tear this year as homeowners, reticent to move and relinquish their low borrowing costs, have kept resale inventory limited and encouraged buyers to seek out new construction. The latest figures suggest high mortgage rates — more than double where they were at the end of 2021 — are starting to bite into that demand.
“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” NAHB Chairman Alicia Huey said in a statement.
After months of having the upper hand, higher rates are also causing more builders to use sales incentives to attract buyers. Sentiment fell across all four major U.S. regions.
The indexes of current sales and prospective buyer traffic both decreased for the first time this year, while the expected sales gauge declined to the lowest level since April.
Data on July housing starts and building permits are due Wednesday.
If you could time travel back to October 20th, 2022, you’d find mortgage rates that are just a hair higher than today’s at most lenders, but the difference is now too small to care about. Not only that, but many scenarios at many lenders would be slightly worse today.
The unfortunate thing about a rate being higher than it was on October 20th, 2022 is that you’d have to go back more than two decades to see anything higher.
Placing our existing pain in a historical context doesn’t offer much incremental benefit. How about understanding WHY rates continue rising regardless of progress on inflation–the thing that was supposed to be the key motivation for the spike.
Motivations are ongoing/general and new/specific. Today’s didn’t actually add much to the bigger picture. Economic data wasn’t highly consequential, but it offered no objection to the notion that high rates have failed to cause significant economic pain outside rate-sensitive industries.
Even in the VERY rate-sensitive housing market, this morning’s data conveyed another in-trend result for residential construction, with housing starts and building permits coming in very close to forecasts just over an annual pace of 1.4 million units.
Why does that matter? Because, as the Fed reminded us via today’s release of the “minutes” from their last meeting, they want to see some ill effects of their rate hikes on the economy before they consider cutting rates. Bottom line: we’re no longer just waiting for inflation to fall back to target levels, but also for economic data to take a turn for the worse.
Have homebuilders reached their limit on how much they can lower mortgage rates to boost demand? Today we got the housing starts data, which was a beat of estimates, but total housing activity isn’t booming here.
I firmly believe that the builders can’t solve the housing inventory situation when it comes to single-family units because they will simply not provide enough. As shown below, we currently have only 72,000 new homes for sale.
This data is returning to more normal levels, but even during the worst days of the housing bubble crash, we never got to 200,000 homes. In a country with over 335 million people (and over 156 million people working), 72,000 isn’t going to do much to move the needle on inventory.
From Census:
Housing Starts: Privately‐owned housing starts in July were at a seasonally adjusted annual rate of 1,452,000. This is 3.9 percent (±16.0 percent)* above the revised June estimate of 1,398,000 and is 5.9 percent (±16.1 percent)* above the July 2022 rate of 1,371,000. Single‐family housing starts in July were at a rate of 983,000; this is 6.7 percent (±13.0 percent)* above the revised June figure of 921,000. The July rate for units in buildings with five units or more was 460,000.
As you can see in the chart below, housing starts have stabilized as new home sales are still showing year-over-year growth, but starts aren’t exactly booming. We must remember that the homebuilders still have a sizable backlog of houses they haven’t started to build yet.
Building permits: Privately‐owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,442,000. This is 0.1 percent above the revised June rate of 1,441,000, but is 13.0 percent below the July 2022 rate of 1,658,000. Single‐family authorizations in July were at a rate of 930,000; this is 0.6 percent above the revised June figure of 924,000. Authorizations of units in buildings with five units or more were at a rate of 464,000 in July.
Housing permits have also stabilized from their fall, and we are seeing more single-family permits issued, but it’s not a big move, as the chart below shows.
How long will the builders keep their advantage?
Why am I focusing on mortgage rates now? Well, mortgage rates are now at the high end of my forecast range for 2023, and we are still dealing with a stressed mortgage market. Over the last year the builders have grown yearly sales by offering lower mortgage rates, which they could do because they had good enough profit margins.
However, for the first time this year, they have expressed concern about their future in the builder’s confidence index: back-to-back declines in the forward-looking six-month data line from the builder’s survey. The headline data also fell for the first time in a long time, but last month the forward-looking data line declined even with the positive print.
Forward-looking housing data for the builders was positive for many months, but in the last two months, that changed, so the builders are more cautious about their future. What has changed is that mortgage rates have stayed higher for longer over the last two months, so we have a direct correlation to higher rates here.
I am a big fan of the HMI data because the builders know more than anyone else what they can and can’t do. You just have to believe in this survey and keep an eye out for whether higher rates are starting to hit their confidence metrics looking ahead. I see cracks in the system that warrant close monitoring because this data line can be very choppy sometimes, but if we get a string of these lines, it makes a trend.
For now, I am keeping a watchful eye on this because if the builders are having issues looking ahead, then the housing market, in general, will be in a slow phase as well. As we saw today with the purchase application data, we aren’t crashing in sales like in 2022, but we aren’t growing either.
Last week ended with a wild ride for mortgage rates. We anticipated the two inflation reports could help mortgage rates, however, we had a bad bond auction last Thursday, and the 10-year yield rose sharply. Weekly active inventory grew slowly again and purchase apps were down week to week again.
Weekly active listings rose by only 4,270
Mortgage rates went from 7.03% to 7.19%
Purchase apps were down 3% week to week
Mortgage rates and bond yields
Last week we started with lower bond yields as we anticipated inflation reports to continue the trend of slower year-over-year inflation data. This happened as expected, except we had a lousy bond auction, which meant too much debt supply came online with insufficient buyers. This pushed yields higher Thursday and Friday to move mortgage rates to 7.19%.
A valid case for higher mortgage rates in the short term is that we are simply going to be in an environment where we don’t have a lot of bond buyers versus the supply coming in, thus making it harder for mortgage rates to go lower. We saw an example of that last week.
For my 2023 forecast, my range on the 10-year yield has been between 3.21%-4.25%, emphasizing that the bond yields can go lower than 3.21% only if the labor market breaks. The labor market breaking to me is if jobless claims on a four-week moving average go over 323,000; currently, that data is 231,000. As the economy has stayed firm, bond yields are at a higher level of my range for 2023.
Weekly housing inventory
The painful housing inventory story of 2023 continues as we had yet another week of slow inventory growth. Last year when mortgage rates spiked higher, inventory growth was much faster, but we were also working from the lowest levels recorded in history in March of 2022. This year, it’s been a much different story.
Same week last year (August 5-August 12): Inventory rose from 543,898 to 550,175
The inventory bottom for 2022 was 240,194
The inventory peak for 2023 so far is 492,140
For context, active listings for this week in 2015 were 1,203,577
As we can see in the chart below, inventory growth has been so slow that active listings have been negative year over year for some time now. For those calling for a massive inventory spike since 2008, the last few years have not gone as planned.
New listings data has been trending at the lowest levels recorded in history for more than 12 months. However, even with higher mortgage rates in the last few months, we haven’t seen a new leg lower in this data line, which means we might be forming a workable bottom in 2023. As you can see in the chart below, 2023 has had a clear divergence versus 2021 and 2022 data, which were already at all-time lows before last year.
Here’s how new listings this week compare to the same week in past years:
2023: 60,759
2022: 73,384
2021: 79,184
Purchase application data
Purchase application data was down again by 3% last week,making the count year-to-date at 14 positive and 16 negative prints. If we start from Nov. 9, 2022, it’s been 21 positive prints versus 16 negative prints. Mortgage rates near or above 7% are simply too high to promote real growth in this data line, which is working from a historical bottom.
So, when rates fall, moving the needle higher for purchase apps won’t take much. However, for now, rates this high have facilitated more negative week-to-week data than positive, leading to lower sales as this data line looks out 30-90 days. While we aren’t seeing sales collapse like last year, we aren’t growing sales meaningfully from the recent lows.
The week ahead: Tons of economic data
This week, we have various economic data reports that can move mortgage rates and give us a sense of where the housing market is going. Retail sales and the Leading Economic Index are out this week. Also, we get two key data lines for housing this week: the homebuilders survey by NAHB/Wells Fargo and housing starts!
What I am looking for in housing data is what the builder survey indicates for the next six months. In last month’s report, we saw a slight decline in this data line. For this week, I want to see how mortgage rates react to the batch of new economic data.
The average U.S. mortgage rate for a 30-year fixed loan fell this week to 2.72%, Freddie Mac said in a report on Thursday – the lowest rate in the survey’s near 50-year history. This week’s rate broke the previous record set on Nov. 5 by 6 basis points.
The average fixed rate for a 15-year mortgage also fell by 6 basis points to 2.28%.
After this week’s record drop, there have now been 17 consecutive weeks when average mortgage rates have been below 3%. This also marks the first time in the survey’s history rates have fallen below 2.75%, and the 13th time this year rates have broken a record.
According to Sam Khater, Freddie Mac’s chief economist, weaker consumer spending data, which accounts for the majority of economic growth, drove mortgage rates to its new record low.
“While economic growth remains unstable, strong housing demand continues to have a domino effect on many other segments of the economy,” Khater said.
Low mortgage rates fuel the demand for valuation and settlement services
VRM Mortgage Services CEO shares how the company is navigating a difficult year, and how its services are impacted by the different national, state and local directives on foreclosure.
Presented by: VRM Mortgage Services
To prevent a credit crunch and make borrowing cheaper, the Federal Reserve started buying bonds – Treasuries and mortgage-backed securities – in March.
Now, these highly favorable mortgage rates are continuing to bring fresh buyers to the market, said National Association of Realtors chief economist, Lawrence Yun. As a result, Yun said home prices are increasing far too quickly, which may prove difficult for first-time buyers trying to come up with a down payment.
October’s housing starts data from the Census Bureau revealed construction is attempting to keep up with that heightened demand as starts rose 4.9% to a seasonally adjusted annual pace of 1.53 million – the highest since this February.
When construction will finally catch up with record low rates is still up in the air, but in September, 13 members of the Federal Reserve’sFederal Open Market Committee said they expect to keep the central bank’s benchmarkrate near zero through 2023.