Limited inventory, high prices stifle housing market
The stock market posted gains for the week largely due to a solid rally on Tuesday that may have been triggered by a report from Politico stating Republican lawmakers were working behind the scenes on tax reform legislation. According to Politico, a consensus is emerging among top administration and congressional officials on ways to pay for individual and corporate tax cuts and reduced tax rates, including capping the mortgage interest deduction and eliminating the deduction for state and local tax payments. Also, businesses would no longer be able to deduct interest payments. Treasury prices increased during the week. The yield on the 10-year Treasury Note fell by 2.80 basis points to end at 2.1694%.
The week's economic and housing data continued to be mixed. Durable goods orders declined by 6.8% in July, in sharp contrast to a gain of 6.4% during June. The decline was largely driven by a substantial reduction in aircraft orders. One encouraging piece of data came from the latest reading on core capital goods, a key measure of business investment, showing an increase of 0.4%. Weekly Initial Jobless Claims increased slightly from 232,000 to 234,000, but remained well under market expectations of 237,000 claims.
In housing, the Federal Housing Finance Agency (FHFA) House Price Index (HPI) released last Tuesday showed home prices increased by 1.6% during the second quarter of 2017 compared to the first quarter. For June 2017, the FHFA's seasonally adjusted monthly index rose 0.1% from May. On an annual basis from the second quarter of 2016 to the second quarter of 2017, home prices have risen 6.6%. FHFA Senior Economist William Doerner remarked “U.S. house prices rose in most states during the second quarter. New home sales are climbing but, relative to the overall population, they still remain low from a historical perspective. The tight inventory is a major explanation for why house prices have been increasing every quarter over the last six years.”
New home sales for July disappointed by missing the consensus forecast of 615,000 with a seasonally adjusted annual reading of 571,000 that was 9.4% lower than an upwardly revised June rate of 630,000 (from an originally reported 610,000). July's reading was also 8.9% lower from the same period a year ago. However, when taking into account the upward revisions that have taken place over the past three months that have collectively added 46,000 new home sales, the July sales pace was not really as bad as it first appeared.
The primary problem for new home sales appears to be a limited inventory of lower priced new homes for sale. Also, higher average selling prices continue to act as a constraining factor. The median sales price increased 6.3% year-over-year to $313,700 while the average sales price increased 4.6% to $371,200. Based on the rate of July sales, the inventory of new homes for sale is currently at a 5.8-months' supply versus 5.2 months for June.
Furthermore, the National Association of Realtors (NAR) reported last Thursday that existing home sales edged 1.3% lower in July to a seasonally adjusted annual rate of 5.44 million versus a consensus forecast of 5.56 million. Although the July's sales rate was 2.1% above the year ago period, it was the lowest sales pace so far in 2017. NAR Chief Economist Lawrence Yun commented "Homes are selling fast" while Zillow Senior Economist Aaron Terrazas stated "The American housing market is stuck in its own kind of stagflation: Existing home sales have been flat since last fall, while home values are up more than 4% over the same period. For more than two years now, inventory has been has been contracting, pushing the housing market into an inventory crisis."
Strong housing demand in July meant listings went into contract in under 30 days. It also pushed prices higher. The median existing home sales price in July was $258,300, a 6.2% increase compared to a year ago and the 65th straight month of year-over-year gains. Inventory (1.92 million) was 9% lower than a year ago, and has fallen year-over-year for 26 consecutive months. Unsold inventory is now at a 4.2-month supply at the current sales rate, versus 4.8 months a year ago and the 6.0-month supply typically associated with a more balanced real estate market.
One positive aspect was an increase in first-time home buyers who comprised 33% of buying volume compared to 32% in June. However, that's still substantially lower than the 40% market share historically taken by first-time home buyers.
As for mortgages, mortgage application volume decreased during the week ending August 18. The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell 0.5%. The seasonally adjusted Purchase Index declined 2.0% from the prior week while the Refinance Index increased 0.3%.
Overall, the refinance portion of mortgage activity increased to 48.7% of total applications from 47.8% in the prior week. The adjustable-rate mortgage share of activity decreased to 6.4% of total applications from 6.6%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance was unchanged at 4.12% with points increasing to 0.39 from 0.38.
For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to close at $103.406. The 10-year Treasury yield decreased 2.80 basis points to end at 2.1694%. The major stock indexes ended the week higher.
The Dow Jones Industrial Average added 139.16 points to close at 21,813.67. The NASDAQ Composite Index rose 49.11 points to close at 6,265.64 and the S&P 500 Index gained 17.50 points to close at 2,443.05. Year to date on a total return basis, the Dow Jones Industrial Average has gained 10.38%, the NASDAQ Composite Index has advanced 16.39%, and the S&P 500 Index has added 9.12%.
This past week, the national average 30-year mortgage rate increased to 3.95% from 3.94%; the 15-year mortgage rate increased to 3.23% from 3.22%; the 5/1 ARM mortgage rate moved higher to 3.20% from 3.17% and the FHA 30-year rate remained unchanged at 3.60%. Jumbo 30-year rates increased to 4.23% from 4.22%.
Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond
The FNMA 30-year 3.5% coupon bond ($103.406, +12.50 bp) traded within a 26.5 basis point range between a weekly intraday low of $103.188 on Tuesday and a weekly intraday high of $103.453 on Friday before closing the week at $103.406 on Friday.
Last week's newsletter forecast range-bound trading with a sideways movement in mortgage bonds resulting in relatively stable mortgage rates for the week, and that was what we ended up with. Rates differed on average by just a few basis points from the prior week. At the risk of sounding like a broken record, not much has changed technically since last week. The bond continues to be extremely "overbought" and susceptible to a turn lower, but could continue to be range-bound and trade between the identified support and resistance levels shown in the chart.
Additional sideways movement in the bond should result in stable mortgage rates in the coming week.
