Newsletter - 05/23/2022
Week of May 16, 2022 in Review
Sales of existing homes and construction of single-family homes eased in April, while Fed Chair Jerome Powell’s comments caused volatility in the markets.
Existing Home Sales Edge Lower
Existing Home Sales, which measure closings on existing homes, showed that sales were down 2.4% in April at a 5.61 million unit annualized pace. This data likely reflects people shopping for homes in February and March, which included much of the rise in rates we’ve seen – but not all of it. On a year over year basis, sales were only down 5.9%, which is still quite strong considering higher rates, higher home prices and tight inventory.
What’s the bottom line? There were 1.03 million homes available for sale at the end of April, up 10.8% from March. However, this equates to just 2.2 months’ supply of homes. Six months is considered a balanced market, so this data speaks to the ongoing imbalance of supply and demand, which should continue to support home prices.
Real Estate Impact: This is still a seller's market. The needle is moving slowly toward the buyers, but we're not there yet. It's still a great time to sell. If you're buying, it's a time to get ready because things could turn your way in the next few months.
Builder Confidence Weakens But Remains in Expansion Territory
The National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, fell 8 points to 69 in May, coming in much worse than expectations. Looking at the components of the index, current sales conditions fell 8 points to 78, future sales expectations were down 10 points to 63, and buyer traffic declined 9 points to 52.
What’s the bottom line? Any reading above 50 on this index, which runs from 0 to 100, signals expansion, while readings below 50 signal contraction. While these numbers aren’t necessarily bad, the drops are significant. Builder sentiment is weakening, as their material costs are still up 19% from last year, home prices and interest rates are higher, and labor issues and a backlog of homes to build remain.
Real Estate Impact: Builder sentiment often precedes market moves. Buyers, keep in contact with your agent and be on the lookout for signs the market is equalizing (bringing buyers into more level footing with sellers)
Single-family Construction Slows in April
Housing Starts, which measure the start of construction on homes, fell 0.2% from March to April. But starts for single-family homes, which are the most important because they are in high demand among buyers, plunged 7.3%. Building Permits, a good forward-looking indicator for Housing Starts, were down 3.2%, while single-family permits also fell, dropping 4.6%.
What’s the bottom line? Despite the monthly declines, overall Housing Starts and Building Permits were higher compared to April of last year. However, as noted above, one of the biggest issues is that builders are still facing challenges in completing homes. Single-family units completed were down 5.1% from March to April, showing that the backlog continues to grow for builders.
What the Media Gets Wrong About Housing Inventory
Recently, there has been media speculation that household formations are lagging and that we could have an oversupply of inventory. Let’s determine what’s really going on.
There were 1.4 million households formed in March (on an annualized pace), which is historically a pretty strong level and above the average. At the same time, looking at last week’s Housing Starts report for April, there were 1.7 million total starts – both single-family and multi-family.
But each year, about 100,000 homes are destroyed due to aging or replacements. So, net, we see around 1.6 million homes created. Subtracting out the 1.4 million household formations, that is only approximately 200,000 units going towards the undersupply in housing.
What’s the bottom line? If Freddie Mac is correct in their thinking that we are undersupplied by 3.8 million homes to meet demand, it would take over 19 years to just reach equilibrium – not even overbought territory. Even if we lower their estimate and are only undersupplied by 1 million homes, it would still take five years at the current pace to reach equilibrium. The numbers don’t support signs of overbuilding or an oversupply.
Real Estate Impact: More evidence that we're still in a seller's market. However, remember that national numbers often obscure local variances. Are we undersupplied? Yes. Might there be a different condition in your area? Yes. During the pandemic, the flight to the suburbs is a well-documented fact in some cities. However, some areas are still seeing relative good deals to be had for large properties even farther out. If you truly can work from home, you might be surprised what you can afford in communities farther from the urban and suburban population centers.
Is the Rise in Initial Jobless Claims a Trend?
The number of people filing for unemployment benefits for the first time rose by 21,000 in the latest week, as there were 218,000 Initial Jobless Claims reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell by 25,000 to 1.317 million. This is the lowest number of Continuing Claims since December 1969.
What’s the bottom line? While the latest week’s data is still a very low level of initial claims, they have been increasing over the past few weeks, and the four-week moving average is at its highest level since February. Should this trend continue, it could be an early sign that unemployment will begin to rise, which is another recession indicator.
Real Estate Impact: Don't try to read the "tea leaves" too much with the multitude of economic data. This is like trying to time the stock market = a bad idea. Instead, judge your buying and selling needs by your own personal situation, considering the broader market but not dictated by it.
Markets Volatile After Fed Chair Jerome Powell’s Comments
Last Tuesday, there was a ton of volatility in the markets following Jerome Powell's comments that the Fed will continue to hike their benchmark Fed Funds Rate until they kill inflation. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks, and it is not the same as mortgage rates. In fact, hiking the Fed Funds Rate can be a good thing for mortgage rates, as the Fed curbs inflation and preserves the fixed return a longer data Bond provides.
What’s the bottom line? However, the Fed has already started to backtrack. Powell indicated that there was a good chance to achieve a “soft landing,” meaning the Fed could slow down or tighten the economy to bring inflation under control while avoiding a recession. Many are questioning if the Fed will have the fortitude to continue tightening to reduce inflation or if they will be forced to reverse course and start being accommodative once again based on market conditions.
Real Estate Impact: Great reminder that the "Fed Rate" or the benchmark rate is NOT what directly drives mortgage rates. Those more closely follow the 10-year bond. Also, time for a good reminder that the one variable in the lifetime of your home (home loan, really) can be the interest rate. Even with a fixed-rate loan, It's the one thing that you can change over time. For instance, If rates drop after you buy, you can always refinance. If you find the right house for the right price, don't lose it simply because you are trying to time the market for interest rates.
What to Look for This Week
More housing news is ahead beginning Tuesday when April’s New Home Sales are released. Pending Home Sales follow on Thursday. On Wednesday, the minutes from the Fed’s May 3-4 meeting will be released and these always have the potential to move the markets.
Thursday brings the latest Jobless Claims figures along with the second reading on first-quarter GDP. Ending the week on Friday, crucial inflation data for April will be reported via the Fed’s favored measure, Personal Consumption Expenditures.
Mortgage Bonds ended last week battling the dual ceiling comprised of the 25-day Moving Average and 101.656 level. The 10-year is trading at around 2.79%, in the middle of a range between support at 2.65% and a ceiling at 2.92%.
Weekly Review by Mark Hedman
Homebridge Financial Services - Sales Manager, Mortgage Loan Originator
Real Estate Impact by Liza Alley