MARKET REVIEW - December 4TH, 2023

MARKET REVIEW - December 4TH, 2023

Mortgage and other long-term interest rates have found some additional reasons to decline of late, and that's helped take at least some of the sting out of the summer-into-fall spike. Economic data released over the last four weeks -- covering the first month of the fourth quarter and part of the second -- have largely had a flat-to-softer tone, and the Treasury's change in the mix of debt it is pushing into the market has also played a role in helping longer-term rates to fall.

The supportive data continued last week, as a mix of both October and now November data provided no reason for rates to change their recent course. The current economic situation appears to be one of a considerable deceleration from the torrid pace of the third quarter, but of course there's a lot of data yet to be seen for this quarter before the picture becomes clear.

In a difficult year for housing, sales of new homes have been a relative bright spot, but amid challenging mortgage conditions, that brightness dimmed a little in October. The Census Bureau reported that sales of new homes in October declined by 5.6%, easing to a 679,000 annual rate of sale from a downwardly revised 719K pace for September. Unlike existing homes, there are plenty of new homes available to buy; at the current rate of sale, it would take 7.8 months to completely deplete supply, and the actual 439,000 units available is the highest figure since January. The supply of homes here isn't the reason sales are throttled, nor is the cost, as the median price of a brand-new home sold in October was $409,300, a figure not only on par with a existing home ($391,800 in October, per the NAR) but one that is also the lowest since August 2021. In fact, the price of a new home in October 2023 is 17.6% below where it was a year ago as builders have looked to price cuts and financing incentives to help move inventory. Certainly, that's not been the case in the existing housing market, as any prospective home buyer will likely tell you.

Adverse financing conditions, high home prices and little available to buy are a recipe for slower existing home sales. Already at their lowest levels in perhaps 12 years, sales appear set to slow even more as we head into the quietest time of the year for real estate. The National Association of Realtors Pending Home Sales Index declined by another 8.5%, leaving this measure of signed contracts to purchase at its lowest level ever in a series that dates to 2001. Since contract signings lead closings by 1-2 months, the decline here portends a downshift in sales from October's 3.79 million (annualized) rate to something around a 3.5 million pace for either November or December, adding more drag to the already seasonally slow period for home sales. While mortgage rates have improved a bit since October with 30-year FRMs declining about a half percentage point, it's not enough to improve the outlook for sales all that much, but it may help limit the downside a bit.

Lower mortgage rates over the last few weeks have helped lift consumer requests for loans, but since rates are still north of 7% even for the best borrowers, there are limits. In the week ending November 24, overall requests for mortgage credit rose by 0.3%, according to the Mortgage Bankers Association. As might be expected, all the gains came from an increase in purchase-money requests, which expanded by 4.7%, part of a four-week string of increases. Refinancing activity dropped smartly, with application activity here falling by 8.9% compared to a week prior and ending a three-week string of increases. Of course, the period was a holiday week and there's not all that much of a compelling reason to refinance now, but the slightly lower rates in the market this week will likely revive at least a little interest in replacing an existing mortgage.
The growing accumulation of data that is supportive of lower rates will need to be joined by even more of the same if we hope to see mortgage rates fully retrace even just the summer-into-fall increases, let alone more. Even from today's levels it will take a considerable leg downward just for rates to break the 7% mark again, a level last seen about four months ago. Still, that rates have backed off 22-year highs and have had a sustained retreat is encouraging, even if it's hardly coming at the most beneficial time of year for homebuyers.

The good news is that this declining trend seems likely to continue this week. Based on how last week's bond markets progressed, we think there's a chance of another 5 or 6 basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac come Thursday, provided the general tenor of the incoming economic data before then remains as it has over the last few weeks.

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