Housing Takes a Medium Step Forward and a Big Step Back _ Market update for July 28, 2014

MARKET RECAP Housing Takes a Medium Step Forward and a Big Step Back It has taken nearly a year, but existing-home sales are finally moving in the right direction. Sales were up once again, climbing 2.6% to a seasonally adjusted annual rate of 5.04 million homes in June. This marks the third-consecutive month of national gains. The existing-home market appears as healthy as it has been for some time. Sales were up, and so were prices. The median price of an existing home increased a stout 5.3% month over month to $223,300. What's more, total existing-home inventory rose to a 5.5-month supply at the current sales pace. So we have rising inventory and rising sales, which point to a lower rate of price appreciation. As more supply comes to market, price growth will naturally ease (though the rate of easing will be tempered by additional demand). Slower price growth coupled with a consistent level of inventory and demand point to a healthier overall market. Many market participants were encouraged by double-digit annual price increases after the bubble burst in 2008, but double-digit annual increases aren't the norm. They can lead to another bubble if they continue for an extended period. This is why we welcome annual price appreciation in the low-to-mid single digits at the national level. Of course, local markets are impacted by variables unique to the area – demography, supply, demand, job growth, composition of jobs, etc. – but over the long-haul the rate of price appreciation and the rate of sales will tend to moderate to a lower-single-digit mean. The good news is the existing-home market is progressing at the national level. The bad news is the new-home market is regressing. This is somewhat surprising, given the strong gains in home-builder optimism in recent months. New-home sales were actually quite pitiful in June, plunging 8.1% month over month to 406,000 units on an annualized rate. The drop in sales raised supply to 5.8 months vs May's 5.2 months. Total new homes for sale increased to 197,000 vs 191,000. What's more, discounting couldn't even move inventory. The median price of a new home declined 3.2% month over month to $273,500. Year over year, the median price of a new home is up 5.3%, but sales are down 11.5%. If demand falls to pick up, either more discounting is in store or fewer homes will be constructed. If either scenario materializes, you can be sure builder sentiment will dive.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (June)	Mon., July 28, 10:00 am, ET	4% (Increase)	Important. Based on recent job-market strength, sales should continue to trend higher.
Mortgage Applications	Wed., July 30, 7:00 am, ET	None	Important. Purchase activity needs to trend higher to maintain existing-home-sales gains.
Gross Domestic Product (2nd Quarter 2014)	Wed., July 30, 8:30 am, ET	3.2% (Annualized Growth)	Important. After a poor first quarter, growth is expected to pick up pace for the remainder of 2014.
Employment Situation (July)	Fri., Aug. 1, 8:30 am, ET	Unemployment Rate: 6.1% Payrolls: 240,000 (Increase)	Very Important. Monthly job growth at the current rate will increase pressure for interest rates to rise.
Construction Spending (June)	Fri., Aug. 1, 10:00 am, ET	0.4% (Increase)	Important. Residential real estate spending will likely post lower based on the recent drop in permit applications.

 

State of the Mortgage Market The housing market is a mixed-bag nationally. The mortgage market, on the other hand, is trending higher. To be sure, we are still plagued by a dearth of purchase activity (though purchase applications increased 0.3% for the latest reported week). We'd love to see purchases trend materially higher; for no other reason that it will signal a more normalized housing market – one driven by owner-occupied buyers. We mentioned a couple weeks ago that lending standards have eased considerably over the past two years based on the MBA's Mortgage Credit Availability Index . We don't expect that trend to reverse. We see further easing in the future. For one, the state of the mortgage market looks pretty darn good. Black Knight (formerly LDS) reports loan delinquencies are down 15% year over year. Overall, foreclosure inventory is now at its lowest since May 2008. Fewer loan delinquencies and lower foreclosure inventory are by-products of improved job growth and higher home prices. On job growth, the economy has been adding 200,000+ new jobs a month for the past five months. An improving employment outlook makes lenders more willing to lend – more jobs, more risk tolerance. At the same time, mortgage loans are still cheap. Bankrate.com shows the national average on the 30-year fixed-rate loan below 4.3%. Freddie Mac shows it below 4.15%. These are 2014 lows. Today, the mortgage market is as favorable to lender and borrower alike as it has been in the past six or seven years. Therefore, we highly recommend borrowers take advantage of the opportunity, because it's impossible to know how long it will last.