Mortgage Finance Commentary: September 2010
August was a month of weak economic data, with disappointing reports from the housing and job markets. Single family housing starts, existing home sales, and new home sales showed significant declines, and in some cases dropped to new historical lows. We maintain our view that the most likely scenario is a continued pattern of tepid growth and no improvements in the unemployment rate until the second half of 2011, with a similarly slow recovery in the housing market.
We also recognize that the odds of a worse outcome, including a return to recession, are still relatively high, and this has kept rates lower than we had projected earlier in the year. Many financial market participants are keenly attuned to any communication from Federal Reserve policymakers regarding a potential renewal of large-scale asset purchases. The decision to reinvest funds from prepayments in the mortgage portfolio into longer-term Treasury securities is best viewed as preventing an inadvertent tightening of policy, rather than a move to outright monetary stimulus. However, were the economic situation to deteriorate, the Fed is poised to act quickly to ramp up purchases, which could bring longer-term rates even lower than they currently stand. We do not believe that this is the most likely outcome, but are aware that many market participants are on the edge of their seats regarding this possibility.
Despite a slight uptick in pending home sales estimates, purchase application data from MBA’s Weekly Application Survey have shown no significant rebound in activity to date, with purchase applications in August still at a 15-year low. The one bright spot here is that the August purchase applications numbers were actually a 1.6 percent increase from July, although that is still a small increase from a very low level.
Housing and Mortgage Data Update
- Total housing starts increased 1.7 percent to a seasonally adjusted annual rate of 546,000 in July from a downwardly revised 537,000 units in June. The current level is 7.0 percent less than the same month a year ago. The monthly increase was driven by a 17.3 percent increase in 5+ units starts, which increased to a 95,000 unit pace from a 81,000 unit pace. Single family starts declined 4.2 percent to 432,000 units from a downwardly revised 451,000 units. On a year over year basis, this was a drop of 13.6 percent. This is the lowest level of single family starts since May 2009 when it was 406,000 units. Building permits decreased 3.1 percent from last month to 565,000 units, from a downwardly revised estimate of 583,000 units. This was 3.7 percent lower than in July of last year. This was the fewest number of permits issued since May 2009. Single family permits also decreased; the July pace was 416,000 permits, a 1.2 percent decrease from 421,000 in June.
- Housing completions dropped 32.8 percent to 587,000 units, from a downwardly revised 874,000 units, which was initially reported as 886,000 units. This was 25.4 percent below the July 2009 pace of completions. Single family completions fell 27.5 percent in July to 490,000 units from 676,000 units. This was 1.4 percent lower than in July 2009.
- Total existing home sales were at a seasonally adjusted annual rate of 3.83 million units in July, a drop of 27.2 percent from a downwardly revised 5.26 million units in June (previously reported as 5.37 million units). On a year over year basis, the level of existing home sales was 25.5 percent lower than in July 2009. This is the lowest level of total sales since the series started in 1999. Single family home sales, which have a history dating back to 1968, reached their lowest level since May of 1995. Driving the drop in total home sales was single family home sales which fell 27.1 percent to 3.37 million units in July from a pace of 4.62 million in June. Single family home sales were 25.6 percent lower than the same month a year ago. This was also the lowest level of single family sales since May 1995 when the sales rate was 3.34 million.
- Total housing inventory in July increased 2.5 percent to 3.98 million existing homes available for sale. This represents a 12.5 month supply at the current sales pace, up from 8.9 months supply in June. This is the highest months’ supply in the history of the data and the largest single month increase. The previous high was 11.2 months in April and July of 2008.
- Sales of newly constructed homes decreased to a seasonally adjusted annual rate of 276 thousand homes in July, a 12.4 percent decrease compared to June. The June numbers were revised downwards from last month’s report by 15,000 units to 315,000 units from 330,000 units. New home sales in July were down 16.7 percent relative to the prior year, and were 21.8 percent lower relative to April, the month that showed the peak impact of the homebuyer tax credit.
- According to MBA’s Weekly Application Survey, 30-year fixed mortgage rates averaged 4.54 percent in August, an 11 basis point decline from the prior month.
- On a seasonally adjusted basis, purchase applications increased by 1.6 percent over the month, following three straight monthly declines. Refinance applications increased by 17.9 percent relative to the prior month, the fourth consecutive monthly increase.
- We predict that mortgage originations will decrease to $1.4 trillion in 2010 from an estimated $2.1 trillion in 2009. Purchase activity continues to be weak, although it was given a brief boost in the spring by the tax credit program, while refinance activity is being propped up by mortgage rates that remain close to historical lows, although there is less refinancing going on now than in previous periods of comparably low mortgage rates. Purchase originations will fall to $539 billion from $740 billion in 2009 and refinance originations will decrease to about $910 billion in 2010 from $1.4 trillion in 2009. This month’s originations estimates for 2010 forward were revised downwards to reflect the weaker July data for home sales and housing starts.
© 2010 Mortgage Bankers Association
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