Market Review - May 16, 2024

Market Review - May 16, 2024

It's well understood that the inflation data over the first few months of 2024 hasn't been good and caused investors to do a full re-think of expectations for interest rate cuts by the Federal Reserve. Still, there remains at least some optimism that a rate cut or two is yet in the cards for this year, but what's now needed is confirmation as to whether price pressures are holding steady, increasing still or starting to subside.

While measurably below the worst levels of last year, mortgage rates are still plenty high, and the housing market is stagnant as a result. We're now just about in the heart of the spring homebuying season, and while sales of existing homes will likely improve a bit yet this spring due to beneficial seasonal effects, but as home prices and mortgage rates are well above year-ago levels, it seems very unlikely that they will best even the modest marks set then. The availability of existing homes to buy is improving somewhat, as inventory levels this March were 14.4% higher than a year ago, but more homes available to buy isn't especially helpful if home affordability is still falling.

The new construction market is less impacted by adverse conditions, as there is plenty of inventory available to buy, and builders may be able to subsidize financing or offer price discounts to help improve affordability for buyers. However, new construction often isn't a direct substitute for existing homes, since much large-scale construction takes place far outside center cities and inner suburban circles, potentially adding commuting considerations and more into the home purchase calculation. Still, new homes are a viable option for some folks, and homebuyers who have had difficulty participating in the existing home market over the last few years appear to be warming up to the chance to buy and own a home even if it means more time in the car and a less-established neighborhood experience.

Tighter credit conditions probably play a role in consumer borrowing behavior. The latest Senior Loan Officer Opinion Survey covering the second quarter of 2024 showed a general ongoing tightening of credit card conditions but somewhat less imposition on other kinds of consumer borrowing. For the most part, the report noted that lending standards were largely unchanged for conforming and government backed mortgages, but slightly more restrictive for the kinds of mortgages that end up in lender portfolios. These include loans that don't fit the Qualified Mortgage definition, Jumbos, ARMs, and similar less-easily-salable mortgage loans.

Applications for mortgage credit rose by 2.6% in the week ending May 3, according to the Mortgage Bankers Association. Request for credit to purchase homes picked up by 1.8%, erasing a decline the week prior, while applications to refinance existing home loans expanded by 4.5%. It was the first increase for both segments in a couple of weeks, likely from folks who simply can no longer wait for lower rates to move forward with home purchases or refinances. Without a measurable retreat for mortgage rates, sustained increase in mortgage applications remain unlikely.

This week sees a busier calendar of economic data than the previous, but the bulk of it doesn't start to come until the middle of the week. This means that this week's flat trend in the yields that influence mortgage rates should be able to hold for at least the early part of the week. We think when Freddie Mac reports on Thursday at noon, the average offered rate for a conforming 30-year fixed-rate mortgage will hold just about steady, with a decline of a couple-few basis points the most likely outcome.

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