The Fed's "dual mandate" sees it targeting price stability and full employment, and it uses its blunt monetary policy tools to try to influence both of these components. While changes to policy may enhance or dull the economy, this is theoretically in service to its dual mandate, rather than any kind of direct stimulus, something usually left to the fiscal side of the ledger. A higher cost of money can deter (or limit) borrowing if someone wants or needs a loan; lower rates may encourage or expand borrowing capabilities, but again, only if a loan is needed.
One sector of the economy that always needs financing to make it go is housing. Last week's report covering sales of existing homes told the same tale we've heard all too often: high mortgage rates, high prices, nothing to buy on the market. That's certainly less the case with the new home market, where financing help may be available from home builders, prices have much greater levels of elasticity, and inventories of homes to buy are plentiful (if not always available where needed),
Sales of new homes rose by 12.3% in September to a 759,000 annual rate, a figure well above estimates, and August sales were revised up by 1,000 to 676,000. The unexpected bump in sales put a dent in the available supply of new homes, but even so there are still 6.9 months of supply even at the enhanced rate of sale last month. Unlike existing homes, prices here actually moved downward last month; they were 3.3% lower than in August, and 12.33% below last September.
Housing affordability comes at the intersection of price, amount being financed and the interest rate on the mortgage. In August, the median price of a new home sold was $433,100; for the sake of calculation, a 20% down payment would have seen a new home buyer with a $346,480 loan amount and an average rate on a 30-year fixed-rate mortgage of 7.13%. The principal and interest (P&I) payment for the mortgage would be $2,335.47 each month.
Favorable comparisons don't end there. Mortgage rates were of course much lower last year than they were this year, averaging just 6.11% in September 2022. But the cost of a newly built home peaked last September at $477,700; even with a 20% down payment the borrower's loan amount would be $382,160 -- almost $50,000 more than today -- so a then-average rate of 6.11%, a home purchased last September would have carried a $2,318.34 monthly P&I payment. As it turns out, and even with mortgage rates more than a full percentage point higher this year than last, buying a median-priced newly built home this year actually carries a monthly payment that is $35.05 less than it was last year at this time.
Now, price alone doesn't reveal anything about the size or location of homes sold, lot sizes or amenities, or anything more than total cost. However, it does show that builders have the means to offset the effects of higher mortgage rates using price cuts partially or wholly and/or financing incentives, at least within limits. That's very different from the existing home market, where it can be difficult for sellers to cut prices or offer meaningful financing assistance.
We do know that rather fewer people sought mortgages in the week ending October 20, though. The Mortgage Bankers Association reported a 1% decline in requests for mortgage funding, a figure pulled down by a 2.2% drop in requests for purchase-money mortgages, but surprisingly propped up by a 1.8% increase in those to refinance existing loans. There's barely any refinance activity at the moment; it doesn't take much to cause percentage-based swings in this measure, and the small bump hardly changes the overall picture much, especially after applications for refinancing dropped by nearly 10% a week prior.
The 10-year Treasury tested the 5% mark on several occasions over the last week or so but couldn't hold there for very long. Stock markets have had a bit of a rough time of it in recent days, and the selloff there looks to have benefited bonds to at least some degree, with the 10-year yield retreating close to its lowest level of the week by Friday's close. That should help set the stage for slightly lower mortgage rates this week, but as it is a week packed with data and a Fed meeting, there are any number of items that could be change the picture without much notice. Given this, it may be foolish for us to think that 30-year fixed mortgage rates as reported by Freddie Mac are likely to fall slightly, possibly managing a five or six basis point decline if nothing seriously upsets the applecart between now and Thursday at noon.
One sector of the economy that always needs financing to make it go is housing. Last week's report covering sales of existing homes told the same tale we've heard all too often: high mortgage rates, high prices, nothing to buy on the market. That's certainly less the case with the new home market, where financing help may be available from home builders, prices have much greater levels of elasticity, and inventories of homes to buy are plentiful (if not always available where needed),
Sales of new homes rose by 12.3% in September to a 759,000 annual rate, a figure well above estimates, and August sales were revised up by 1,000 to 676,000. The unexpected bump in sales put a dent in the available supply of new homes, but even so there are still 6.9 months of supply even at the enhanced rate of sale last month. Unlike existing homes, prices here actually moved downward last month; they were 3.3% lower than in August, and 12.33% below last September.
Housing affordability comes at the intersection of price, amount being financed and the interest rate on the mortgage. In August, the median price of a new home sold was $433,100; for the sake of calculation, a 20% down payment would have seen a new home buyer with a $346,480 loan amount and an average rate on a 30-year fixed-rate mortgage of 7.13%. The principal and interest (P&I) payment for the mortgage would be $2,335.47 each month.
Favorable comparisons don't end there. Mortgage rates were of course much lower last year than they were this year, averaging just 6.11% in September 2022. But the cost of a newly built home peaked last September at $477,700; even with a 20% down payment the borrower's loan amount would be $382,160 -- almost $50,000 more than today -- so a then-average rate of 6.11%, a home purchased last September would have carried a $2,318.34 monthly P&I payment. As it turns out, and even with mortgage rates more than a full percentage point higher this year than last, buying a median-priced newly built home this year actually carries a monthly payment that is $35.05 less than it was last year at this time.
Now, price alone doesn't reveal anything about the size or location of homes sold, lot sizes or amenities, or anything more than total cost. However, it does show that builders have the means to offset the effects of higher mortgage rates using price cuts partially or wholly and/or financing incentives, at least within limits. That's very different from the existing home market, where it can be difficult for sellers to cut prices or offer meaningful financing assistance.
We do know that rather fewer people sought mortgages in the week ending October 20, though. The Mortgage Bankers Association reported a 1% decline in requests for mortgage funding, a figure pulled down by a 2.2% drop in requests for purchase-money mortgages, but surprisingly propped up by a 1.8% increase in those to refinance existing loans. There's barely any refinance activity at the moment; it doesn't take much to cause percentage-based swings in this measure, and the small bump hardly changes the overall picture much, especially after applications for refinancing dropped by nearly 10% a week prior.
The 10-year Treasury tested the 5% mark on several occasions over the last week or so but couldn't hold there for very long. Stock markets have had a bit of a rough time of it in recent days, and the selloff there looks to have benefited bonds to at least some degree, with the 10-year yield retreating close to its lowest level of the week by Friday's close. That should help set the stage for slightly lower mortgage rates this week, but as it is a week packed with data and a Fed meeting, there are any number of items that could be change the picture without much notice. Given this, it may be foolish for us to think that 30-year fixed mortgage rates as reported by Freddie Mac are likely to fall slightly, possibly managing a five or six basis point decline if nothing seriously upsets the applecart between now and Thursday at noon.
