Interest Rates: Flat
For two weeks now, interest rates are flat, according to the most recent survey by Freddie Mac. The 30 year fixed mortgage rate was unchanged at 4.5%. Last year at this time the 30 year fixed mortgage rate averaged 4.69%. The 15 year fixed mortgage rate was up slightly this week to 3.69% over last weeks 3.67%.
Flat interest rates were attributed to a flat news in the housing market. New construction on single family homes was up slightly in May but still below 2010’s pace. Existing home sales were lower as housing still struggles to find momentum.
Interest rate chart below:
Interest rates are well below last year’s rates showing the economy remains sluggish. This is good news for investors and home buyers who are able to get financing to buy property. Low interest rates coupled with depressed home prices are allowing investors to lock in their debt service near record lows. In doing so, as rents rise and inflation occurs with a recovering economy, investors will likely see increased cash flows in the future.
Existing Home Sales Decline
Sales of existing homes fell 3.8% in May versus April and are now over 15% below last year’s pace, according to the National Association of Realtors. The year-over-year drop in home sales stems from the homebuyer tax credit nearing the end of its cycle, causing sales to boom last May.
Distressed sales accounted for 31% of all existing home sales in May, down from 37% in April and on par with 31% in May 2010. Cash transactions accounted for 30% of existing home sales in May, down slightly from April’s 30%, still much higher than Mays 25% in 2010. First-time home buyers accounted for 35% of sales in May, down slightly from April’s 36%. This is down significantly from last year when the home buyer tax credit was in force. At that time, first time buyers accounted for 46% of existing home sales. Investor interest may have peaked. Investors accounted for 19% of existing home sales in May compared with 20% in April. Last May they were 14%, but has been have been as high as 23% in winter 2010.
Total inventory dropped by 1% to approximately 3.7 2 million existing homes on the market. At the current pace the inventory represents a 9.3 month supply, up from a 9 month supply at the end of April.
The pace of sales continues to be very slow. This slow pace is causing this the supply to look as if inventories are increasing when in fact they are decreasing. Despite the declining overall inventory this slow-paced of sales is very concerning and will likely mean that conditions will not improve anytime soon.
New Home Sales: Uptick
Year-over-year new home sales were up in May to a seasonally adjusted annual rate of 319,000 according to the US Census Bureau. This represents a 13.5%. increase over May 2010. The pace is 2.1% below April’s pace of 326,000. The new construction market has been hit especially hard by the crisis. Home builders remain very un-confident according to NAHB’s latest survey.
We should be seeing new home sales recovering but unfortunately builders are still unable to get financing. Many of my banker friends are still sitting on vacant lots they took back from builders 2-4 years ago. This makes a poor case for new lending. Banks can liquidate finished product much quicker than land.