Weekend Talking Points - 'Budding'

Authored By:
Scott Bradley Brixen
John Smith
January 1, 2023
5 min read

Another rough week for buyers, as mortgage rates approached 7.5% in response to a blistering retail sales figure and Jerome Powell’s crisis of (inflation) confidence.

Fannie, Freddie and the NAR settlement. Responding to an NAR request, Fannie Mae and Freddie Mac issued identical policy clarifications. The bottom line is that if sellers offer to pay a buyer’s agent commissions, those payments will not be treated as interested party contributions (IPCs), and therefore not part of the % cap on seller contributions. [Fannie Mae, Freddie Mac]

Shopping, not dropping. Retail sales for March were much stronger than expected, rising 0.7% month-over-month (the market was expecting +0.3%) and sales excluding autos were up 1.1% MoM. In addition, February retail sales were revised UP to +0.9% MoM (from +0.6% MoM). [Commerce Department]

Another gut-punch for bonds (and homebuyers). Following last week’s ‘1–2 punch’ of hotter jobs and inflation numbers, the strong retail sales figures brought even more pain to the bond market. 10-year US Treasury yields leaped above 4.6%, and average 30-year mortgage rates jumped to 7.5%. [MBS Highway, Mortgage News Daily]

Powell losing confidence. Speaking at a forum on Tuesday, Fed Chairman Jerome Powell said that “Recent data have clearly not given us greater confidence [that inflation is under control and] instead indicate that it’s likely to take longer than expected to achieve that confidence.” [Federal Reserve]

Rate cuts get “priced out.” Current implied probability of a Fed rate cut on May 1? 2%. How about June 12? 15%. And July 31? 41%. You’ve got to go all the way out to the Sept 18 meeting to get better than 50/50 odds for a rate hike. [CME]

Growth in builder confidence stalls. The National Association of Homebuilders’ confidence index was flat at 51 in April, having risen each of the prior four months. The Buyer Traffic component of the index (35) continues to drag the overall index down. Current Sales Expectations (57) and Future Sales Expectations (60) remained well above the 50 break-even point. [NAHB]

New home activity slowed. Total housing starts fell 14.7% MoM (-4.3% YoY) to a seasonally-adjusted, annualized rate of 1.32 million units. Within that, multifamily starts (5 or more units) plunged 21% MoM (-44% YoY) to a SAAR rate of 290,000 units, the lowest figure since 2017, excluding COVID. [Census Bureau]

Sellers feeling FOMO. Realtor.com’s 1Q 2024 Sellers Survey found that 85% of prospective sellers have been thinking about selling for 1–3 years already. In addition, 79% of recent sellers wished that they had listed their home earlier when the market was hotter. 79% of prospective sellers felt locked in by their current mortgage rate, but 29% plan to sell anyway “for personal reasons” [Realtor.com]

Existing home sales relatively resilient. March existing home sales dropped 4.3% MoM to 4.19 million (seasonally-adjusted, annualized rate). Considering that average 30-yr mortgage rates were on an upward trend in Feb/March, this is a reasonably strong result. The median sales price rose 2.3% MoM in March to $393,500. [NAR]

Activity levels warming up. The Realtors Confidence Index for March saw first-time buyers becoming more active (32% of sales), competition levels rising (3.1 offers per home sold, 29% of homes sold above list price), and faster sales (days on market dropped to 33). [More on this later] While this is largely a seasonal phenomenon, the increased demand despite higher rates is impressive. [NAR]

Investors staying active. According to data from CoreLogic, 29% of the single family homes sold in 4Q 2023 were purchased by investors. That’s a new % record, but it doesn’t mean that investors are buying more units. Activity levels have shrunk for all buyers, but on a relative basis, investors have stayed more active. [CoreLogic]

Renting forever? In a survey commissioned by Redfin, 38% of renters said that they may not ever buy a home. That’s up from 27% last year. Why so pessimistic? High home prices, difficulty saving up for a down payment, and mortgage rates. Sound familiar? [Redfin]

Home insurance is making the news. A recent Wall Street Journal article, The Hidden Costs of Home Ownership are Skyrocketing (4/10/2023), noted the massive increase in insurance premiums across the country and cited a 2022 study by Fannie Mae that non-mortgage costs (property taxes, home insurance, HOA fees etc.) now represent more than half of total home ownership cost. [WSJ]

Built-for-rent keeps booming. According to analysis from Apartment List, 9% of the single-family homes (SFH) started in 2023 were for built-for-rent (BFR) communities. A decade ago, that figure was 4%. Here’s the issue: the rising share of BFR homes actually makes the inventory situation worse for would-be buyers. The National Association of Homebuilders estimates that the US housing market is short ~1.5 million single family homes. [Apartment List]

Realtors Confidence Index for March

Every month, the NAR surveys Realtors and asks them for a combination of hard and soft data. The results of this Realtors Confidence Index (“RCI”) are released on the same day as the existing home sales figure. I consider it a very useful gauge of competitive ferocity.

First-timers can’t wait any longer. Probably the most important datapoint from the March RCI was the rebound in first-time buyer participation (32% of purchases). Over the previous few months, the % of all-cash (no mortgage) deals had been rising, crowding out first-timers. That reversed in March.

Competition is heating up, like it does every Spring. The median home sold in March 2024 was on the market for 33 days, a big contraction from 38 days in February. The comparable figure in March 2023 was 29 days.

The % of properties selling above list price is also turning up. In March 2024, 29% of homes sold above their list price, up from 20% in February 2024, and similar to 28% in March 2023.

More multiple offers. In March 2024, there was an average of 3.1 offers for every property sold, up from 2.7 in February 2024. In March 2023, the figure was 3.2.

Mortgage Market

The 1–2 punch of “hotter” jobs growth and rising inflation the prior week was followed by a blistering retail sales figure and Powell’s ‘loss of confidence’ comments this week. Average 30-year mortgage rates jumped to 7.5%, but have since eased. The yield on the 10-year US Treasury bond remains above 4.6%.

Current odds on Fed rate cuts at upcoming FOMC meetings:

  • May 1: 2% (down from 5% last week)
  • Jun 12: 15% (down from 22% last week)
  • July 31: 41% (down from 48% last week)
  • Sept 18: 65% (down from 69% last week)
They Said It

“Growth in single-family rentals is driven by a strong demand for single-family homes but a lack of affordable homeownership opportunities. Home prices have nearly doubled over the past decade, and two-thirds of that growth has occurred since the pandemic. Compounding this are high interest rates that further amplify the long-term costs of owning a home. So for many households that want to live the single-family lifestyle, renting is the only financially viable option.” — Apartment List “A Surge in Built-for-Rent Single-Family Homes.”

“Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves. There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.” Lawrence Yun, NAR’s Chief Economist

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