The market timers are now well in control of the housing market. It’s to the point where even a small backup in rates is enough to slow mortgage activity.
If you’re not a believer, check out this morning’s mortgage data, which shows that mortgage applications flattened out on both the new homes and refinancing sides as rates held steady. Indeed, the closer mortgages get to 7%, the less activity there is.
Homebuilders May Feel the Pinch
The rise in mortgage rates in February flattened out new home sales, even as existing home sales beat expectations. This is a sign that the housing sector is retuning its vibe as inventories start to climb.
In recent posts, I’ve noted that the housing market is shifting and that market timing is now the dominant force influencing the activity in the sector. Specifically, I’ve noted that both buyers and sellers have adjusted their expectations on mortgage rates while at the same time waiting for rates to drop, even a small amount in order to buy. In other words, both buyers and sellers have now become very attuned to the shifts in bond yields and their relationship to mortgage rates; a fact which I allude to here on a weekly basis.
Yet this week’s PCE data, to be released on Good Friday when the markets are closed could be an important cog in what the Fed says and does in the next few weeks to months. For housing, it means that the slowing sales activity in new homes could be significantly affected.
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The Latest Numbers and what they Mean
Here is more evidence of this developing phenomenon. According to the National Association of Homebuilders, citing HUD data, sales of newly built single family homes fell by a lower than expected 0.3%. What’s most interesting about the report, is the confirmation by NAHB, that as I noted above, buyers and sellers are increasingly sensitive about mortgage rates.
That’s because shifting demographics; an aging population looking to downsize, a rise in younger homebuyers looking to form families, and the ongoing migration away from large cities to suburbs and other regions of the country are still supportive of at least steady sales. But here’s what’s encouraging. The market, and market participant behavior and expectations have now evolved to the point where people are willing to buy and sell homes when rates fall, even a little.
Moreover, because supplies are still tight, the most likely mode of operation for the market in the future is that we are likely to see higher bumps in activity during periods when bond yields fall and mortgage rates follow.
Inside the report, several data points stand out:
· Homebuilders are aggressively buying down mortgage points – in some cases as far down as in the 5.75 or lower area;
· Homebuilders are building smaller homes;
· New home inventories are climbing with an 8.4 month supply available versus the norm of six months:
· Prices for new homes are coming down – the median new home price fell 7.6% year over year; and
· New home sales in the Northeast (47%), the Midwest (29.7%) and the West (41%) are rising. New home sales in the South fell 13.4%.
Why this Matters – Think Friday’s PCE Number
The housing market, as described by all related industrial sectors which contribute it – ranging from homebuilders, brokers, and realtors, to building material companies and home furniture and appliance companies account for roughly 16% of U.S. GDP. That means that rising or falling fortunes in the housing market are significant contributors to the economy.
In addition, as home prices stabilize or fall, the numbers will work their way into the inflation numbers, such as CPI, PPI, and even the Fed’s favorite PCE (Personal Consumption and Expenditure) indicator. The expenses registered by home owners are a significant contributor to the number. Together with rental costs, and utilities (electricity and gas), any decline in these areas could provide a pleasant surprise to the inflation outlook and give the Fed some room to maneuver.
Meanwhile the latest consumer confidence numbers ticked down again while the Dallas Fed’s most recent manufacturing survey continued to fall. Inside the survey, there were a lot of gloom and doom comments
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Bond Yields Wait for Numbers
The U.S. Ten Year Note yield (TNX) is still range bound within the 4.1%-4.4% range, as bond traders wait for signs that inflation is waning. A better than expected PCE number and more dovish talk from the Fed would likely launch a move toward a test of the 4.1% support level.
The homebuilder stocks, as in the SPDR S&P Homebuilders ETF (XHB) are also marking time ahead of the number, while keeping an upward bias. The recent breakout in XHB is so far holding as investors wait for the number. Because it will be released on Good Friday, the stock market will have to wait until Monday before fully responding.
Bottom Line
It’s all about interest rates. If this week’s PCE deflator comes in better than expected, the odds of a decline in bond yields and mortgage rates will rise. That would be bullish for the homebuilders.
On the other hand if bond yields back up, expect the market timers in the housing market to keep their wallets in their pockets.
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