Housing Market Still Alive and Well!

The Mortgage Corner

Calculated Risk

The Mortgage Bankers Association said last week its Builder Applications Survey data for January showed mortgage applications for new home purchases jumped by 43 percent from December, though was unchanged from a year ago.  This should silence the doomsayers who predict labor shortages and higher tariffs are sure to kill the housing market.

"After two lackluster months, new home sales surged...in January to the fastest pace in our survey, dating back to 2013," said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. "Despite the jitters potential homebuyers felt in December from the volatility in the financial markets, the healthy job market and wage growth, moderating price gains and lower mortgage rates all helped home sales recover. Additionally, builders seem to be seeing improvement in their labor shortages, as recently released government survey data showed increases in construction hiring and openings in December."

Mortgage interest rates have indeed come down with a vengeance since December. The 30-year conventional fixed rate guaranteed by Fannie Mae and Freddie Mac is now 3.75 percent for a one-point origination fee, and the so-called high-balance conventional rate is 4.0 percent with one origination point for the most credit-worthy borrowers.

That’s why home builders’ confidence index jumped 4 points to 62 from 58 (percent of those surveyed), according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), which is also good news.

So housing construction isn’t about to die, which is a sign economic growth isn’t gasping for air either in this full employment, low-interest rate environment. February marked the second consecutive month in which all the HMI indices posted gains. The index measuring current sales conditions rose three points to 67, the component gauging expectations in the next six months increased five points to 68 and the metric charting buyer traffic moved up four points to 48.

“Builder confidence levels moved up in tandem with growing consumer confidence and falling interest rates,” said NAHB Chief Economist Robert Dietz. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5 percent in November to 4.4 percent this week. However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

There is more to the jump in builder confidence and new-home construction. The millennial generation is forming more new households this year, and at least 50 percent have historically wanted to buy a home. Researchers at the San Francisco Federal Reserve have been finding such an increase.

“The shares of young adults heading households now are similar to rates seen at the start of the housing boom,” said SF Fed researchers. “Moreover, while more young adults are living at home longer, data suggest they are continuing to transition to higher headship rates as they get older…Given current 12-month annual headship rates by age group, the Census Bureau projections imply household formations averaging on the order of 1.4 to 1.5 million per year through 2020. That is much better than an average of a little less than 900,000 annually over the past five years.”

MBA estimated new single-family home sales at a seasonally adjusted annual rate of 713,000 units in January, based on data from the BAS, an increase of 29.2 percent from the December pace of 552,000 units. On an unadjusted basis, MBA estimated 54,000 new home sales in January, an increase of 45.9 percent from 37,000 new home sales in December, a whopping increase.   

Conventional loans composed 68.7 percent of loan applications, FHA loans composed 18.6 percent, RHS/USDA loans composed 0.5 percent and VA loans composed 12.2 percent. The average loan size of new homes decreased from $334,944 in December to $334,532 in January.

The jump in finance applications and home building in January shouldn’t be surprising. The U.S. economy continues to perk along, seemingly ignoring any bad news, such as the just-released FOMC minutes of the December meeting that sees cloudier skies ahead for the U.S. and world economies this year.

Harlan Green © 2019

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