Trade Deals Announced, Home Sales Constrained by Higher Rates

Stocks are higher and Mortgage Bonds are slightly lower so far this morning, with the 10-year yield up 3bp. Japanese 10-year Treasuries are rising after a soft auction to their highest level since 2008, which is pressuring globally yields a bit higher, including our 10-year Treasury.

The big news overnight was a trade deal with Japan, following deals put together with the Philippines and Indonesia yesterday. It’s been reported that the US is currently negotiating with Taiwan and that the EU is going to be presenting a trade proposal in the coming days. As mentioned earlier in the week, Bessent said talks with China are going well and that they are likely to extend the August 12 deadline to put a deal together.

Existing Home Sales

Existing Home Sales fell 2.7% in June to a 3.93M unit annualized pace, which was worse than the 0.7% drop expected. This report measures closings in June, which likely reflects people shopping and signing contracts in April and May when rates were higher and above 7% for much of that time.

Sales are well below where they would normally be at this time of the year, which means there is a lot of pent up demand that continues to grow. A drop in rates would likely result in a big surge in purchases.

The median home price rose 2.7% month over month and 2% from last year to $435,300. Inventory fell 0.6% from May, but is still up 15.9% year over year, ending June with 1.53M units for sales. Of course, that includes homes under contract that have not closed yet and are not truly available. Active listings are only 1.08M, and while that’s 29% higher than last June, it’s still 11% below pre-pandemic levels…and the population has grown 12 million since then.

Putting together the pace of sales and inventory, there is a 4.7-months’ supply of homes, which was slightly higher than 4.6 months in May. Homes remained on the market for 27 days, unchanged from the previous month. 21% of home sold above the list price, which was down from 29% last year.

First-time homebuyers made up 30% of transactions, unchanged from last month and up from 29% last year, while cash buyers made up 29% of transactions, up from 27% last month and 28% last year. Investors made up 16% of transactions, down from 17% previously and 16% at the same time last year.

NAR Chief Economist, Lawrence Yun, said, "The record high median home price highlights how American homeowners' wealth continues to grow—a benefit of homeownership. The average homeowner's wealth has expanded by $140,900 over the past five years. Multiple years of undersupply are driving the record high home price. Home construction continues to lag population growth.”

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Mortgage Apps

Rates last week were pretty stable, on average around 6.875%, but we did see an increase in purchase activity. Purchase application volume rose 3% and is up 22% year over year.

Refinances fell 3% and are also up 22% year over year. Refinances made up 40% of total transactions, down slightly from 41% in the prior week.

Rates have since moved down to 6.75% and there may be an uptick in activity in the next report if the move is sustained and we see continued improvement.

Technical Analysis

Mortgage Bonds are being squeezed in a narrow range between support at the 25-day Moving Average, which has held the last three trading sessions, and overhead resistance at 101.39. If Bonds can break above the aforementioned ceiling, there is a lot of room for improvement.

The 10-year was stopped yesterday at its 100-day Moving Average and is now testing overhead resistance at the 200 and 25-day Moving Averages. If yields are able to close under these levels, it would be a positive sign.