Mortgage Matters: The Trend Has Been No Friend In 2018

July 30, 2018

0 3 minutes read

From a historical perspective, though, the inventory remains as barren as a soon- to-be shuttered K-Mart. A six-to-seven-month supply is considered the norm. This range is seen as balancing…

By, Brian Barker

The sales trend has hardly been our friend this year.

The trend in existing-home sales is down. Sales decreased for a third consecutive month in June. Sales posted at 5.38 million on an annualized rate. Existing-home sales are down 2.2% year over year.

Sales trending down is the byproduct of an all-too-familiar dynamic: low inventory, high prices.

On the inventory side, inventory actually rose to 1.95 million existing homes offered for sale. The uptick lifts unsold inventory to a 4.3-month supply.

From a historical perspective, though, the inventory remains as barren as a soon- to-be shuttered K-Mart. A six-to-seven-month supply is considered the norm. This range is seen as balancing the demands of sellers and buyers.

With inventory holding so low, demands of sellers outweigh those of buyers. Prices continue to rise at an exceptional rate. The median price of an existing home stands at $276,900. That’s 5.2% higher than the median price a year ago. When home-price gains out run wage-rate gains by a two-to-one margin, affordability becomes problematic for more buyers.

Affordability has become especially problematic for first-time buyers. Sales of entry-level homes, those priced below $250,000, have fallen more than most. Indeed, the drop in entry-level-homes sales accounted for nearly all the year-over- year drop in existing-home sales.

The good news is that it appears the inventory dearth has bottomed. The bad news is that the return to historical norms could take years. So don’t expect a stratosphere-challenging accession in existing-homes sale in the near future.

The new-home market is unlikely to offer balance to an unbalanced market.

Total housing starts fell 12.3% to a 1.173 million annualized rate in June. New home sales moved in a similar direction (down) in June.

New-home sales decreased 5.3% to 631,000 units at an annualized rate. This is the lowest sales rate since last October. The June swoon drops the year-over-year gain to 2.4%. The supply of new homes is at a nine-year high at 301,000 units. At the June sales pace, 5.7 months would be required to clear the market.

New-home prices appear to favor buyers more than existing-home prices. The median price of a new home was $302,100 in June. The median price of a new home is down 4.2% year over year.

But this could be as good as it gets on new-home supply and prices.

Residential fixed income investment has decelerated in 2018. We know the reason: soaring costs. We mentioned last week that tariffs applied to imported Canadian lumber have increased the average price of a home by $9,000, according to NAHB estimates. New tariffs applied to imported steel and aluminum will only exacerbate the cost trend.

Unfortunately, entry-level housing will continue to suffer more than most segments. We expect the dual trends of falling supply and rising prices to persist. This isn’t good news for first-time buyers. It’s not good news for housing. New entrants are needed to grow a market. As it stands today, new entrants are being priced out of the market. That’s bad news for the long-run health of housing.

Good News Leads to Rising Mortgage Rates

Mortgage rates are near a one-month high. Rates remain range-bound, with the range on the prime 30-year conventional loan holding at 4.625%-to-4.75%. The congregation has moved closer to the 4.75% limit over the past couple of days.

We mentioned two weeks ago that good news on tariffs would likely cause interest rates to rise. We received some good news over the past week. The Trump administration has purportedly struck a deal with European Union bureaucrats to avert a full-blown trade war between the regions. Both sides have agreed to throttle back on tariffs applied to each other’s imports.

Good news emboldens market participants to wander out on the risk curve. They’re more willing to buy riskier assets (such as stocks). Their purchases are frequently paid for with the sales proceeds of haven investments like U.S. Treasury securities. Yields on these securities have risen over the past week.

The yield on the influential 10-year U.S. Treasury note is up 10 basis points in 10 days. The 10-year note holds sway over long-term mortgage rates. We shouldn’t be surprised, then, that rate quotes on 30-year fixed-rate mortgages have risen as well.

We’ve warned repeatedly over the past month that the risk in floating is on the rise. The risk materialized this week. Our opinion hasn’t changed. We still see the risk in floating outweighing any potential gains from floating.