A busy week of mostly negative news for the macro housing market offers; a look at NAR’s Existing Home Sales report, numbers on new home sales, interest rates, mortgage applications, and the Mortgage Bankers Associations quarterly report on delinquency and foreclosures.
Existing Home Sales: Expected Fall
The National Association of Realtors reported that existing home sales dropped 27.1% from June to 3.37million in July (seasonally adjusted annual rate). This leaves existing home sales nearly 26% lower than a year ago. This represents the lowest level of existing home sales since May of 1995.
While this fall has been expected, many are thinking the drop after the home buyer credit would have been softer showing signs that the market is healthy in the summer months. This did not happen. Home sales have been plummeting since the expiration of the tax credit showing consumers are very concerned about getting off the fence and buying. Further this shows that the $8000 credit received weighed heavily on peoples minds whether to buy or not.
New Home Sales: New Low
HUD and the Census Bureau reported new home sales dropped sharply in July to a seasonally adjusted annual rate of 276,000. The 12.4% drop caused the supply of new homes to grow to 9.1 months. The pace of new home sales is now 32% lower than July 2009’s pace of 408,000.
This is startling. As the pace of new home sales continues to decline, people who are buying (and not many of them are), are choosing to buy foreclosed properties. The silver lining (and I’m always looking for it), seem to be the fact that nearly 1.6million new homes need to be built annually to keep up with demand. While the number of new homes being constructed vs. sold are 2 different things, an unhealthy market for builders to build will accelerate supply reduction.
Interest rates continued their decline this week as Freddie Mac reported the 30-year fixed rate dropped to 4.36%, down 0.7% from the prior week. Last year at this time, the 30-year fixed averaged 5.14%. Rates on 15-year loans continued to decline as well dropping to 3.86%, down 0.6% from the week prior.
What’s there to say? Rates are declining as investors sink money into bonds. A bond bubble may in fact be forming and the hint that inflation is coming back could topple the recent inflows into the bond market accelerating the reversal in the current interest rate trend. A nearly unbelievable opportunity still exists for those looking to lock in long term on cheap interest and real estate prices, despite the uncertainty in the housing market.
Mortgage Applications: Refinances Dominate, Purchases Up
Refinances continued to capture attention due to declining interest rates as the Mortgage Bankers Association reported the Refinance Index jumped 5.7% from the prior week and reached its highest level since May 1, 2009. The Purchase Index increased 0.6% from the prior week but is 38.8% year-over-year lower than this time last year.
People simply aren’t confident enough today to do more than refinance existing debt. This is pretty fascinating and likely will continue until the sentiment turns positive. With another European debt crisis around the corner and the unlikelihood of good news in the housing market, I doubt we’ll see Americans start buying houses anytime soon.
Foreclosures and Delinquency Decline
The Mortgage Bankers Association also reported that delinquency rates for mortgages on 1-4 unit properties dropped .21% to a seasonally adjusted rate of 9.85% on all loans in the second quarter. This represents a year-over-year increase of .61%. Further, the percentage of loans on in which foreclosure proceedings started was 1.11%, down .12% from last quarter and down a full .25% from a year ago.
Ending our coverage on a good note, is the fact that delinquency trends may finally be reversing (even if slightly). We have a long way to go yet assuming unemployment remains constant, 6 months from now we’ll be seeing this number in decline. Outside of job growth, time is the only thing that is going to heal the wounds of the sub-prime and alt-A mortgage boom.
Investing in Uncharted Waters
I’m getting a feeling that pent-up demand in the market is becoming real. People are just too scared right now to do anything, but fortunately, you can. With rates at all time lows and prices at deep discounts, opportunities are around every corner. Not only are smart investors buying right now, but they’re buying heavy. I’ve noticed they’re investing in real estate like a stressed bond, knowing the asset won’t decline to zero(deriving a floor). They’re buying real estate for yield. If one is factoring in potential declines in rent and additional price declines, real estate today can be highly profitable. Creating bond floors to determine declines in these rents can still produce sufficient yield to beat other asset classes. Real estate doesn’t have to be the falling knife that stocks at the end of 2008 were. Buy for yield.