Logan Mohtashami, Benzinga Contributor
As the housing selling season winds down with the end of spring and the beginning of the summer months, it is a good time to get informed perspective of housing demand for the year. This can be gleaned from three major metrics; mortgage purchase applications, existing home sales and new home sales, year over year (YoY).
Six months of data for the first indicator, mortgage purchase applications, shows applications significantly down compared to the same period last year.
1. Mortgage purchase applications are down -16% YoY.
(All charts from Professor Anthony Sanders)
Mortgage demand has been soft since interest rates rose in May of 2013. Even though we saw the typical seasonal pick up on total volume for the first half of the year, year over year purchase applications have been down double digits.
Because the interest rate spike that started in May of 2013 lead to a larger decline in purchase applications than one would expect due to seasonality, the YoY purchase applications comps for the second half of 2014 will look “less bad”. If we don’t see a single digit YoY decline in applications then demand is truly weaker for the second half of the 2014.
2. Existing Home Sales – 5% YoY
5 months of data year to data.
Cash buyers continue to prop up existing home sales, staying above the 30% level of total buyers of existing homes . Historically cash buyers are 10% of the market. Cash buyers are up slightly from last year, but the total number of homes purchased with cash is lower due to the smaller number of distressed homes on the market. This YoY metric shows how soft the demand is from traditional (mortgage) buyers. First time home buyers as a percentage of all mortgage buyers have been in a range of 26%-29% for 2014, below their historical norm of 40%.
We can expect 1 to 2 more months of increasing sales before the dampening effects seasonality kicks in, as happens each year. 2013 had a peak Seasonal Annual Adjusted Rate of Sales (SAARS) of 5.39 million. I project a peak SAARS of 5.14 -5.21 million in the up coming sale reports but even with more homes on the market, we will not see growth from last year. Look for total sales to be between 4.78 million to 4.93 million. There is not enough demand to have even a flat year in sales, year over year, even with increased inventory.
3. New Home Sales +1% YoY
The last metric, YoY New Home Sales are up! — but only by 1%. This sector is primarily driven by the wealthier buyer and is composed of only about 15% of first time buyers. I expected this number to be higher because historically new homes are about 1/6th of the market and in the last year they were only 1/10th of the market, so there was lots of room to grow. The weakness in this sector can be explained by the fact that the Median Income to Median Price (MI2MP) for new homes is well above what is was during the housing bubble years. These homes are just too expensive for many main street America buyers. Having said that, we should finish the year with total growth of 8-12% YoY in new home sales. There is also growth in housing starts, sales and permits– boosted by rental construction demand and demand from wealthy buyers. With the inventory of existing homes rising, some buyers in 2015 will be weighing the comparable value of existing homes to the pricey new homes. That could be an interesting economic dynamic to watch for in 2015.
Home ownership in the current economic climate is heavily tilted toward the wealthy — those with good incomes or cash to buy. The metrics for housing show decreased mortgage applications, decreased existing home sales, with a high percentage of cash buyers, 4% YoY increase in sales for existing homes priced over 1 million dollars, 1% increase in new homes sales and strong demand in construction for rental housing.
Not only are there not enough first time home buyers in the market but I am seeing financial stress among move-up buyers. This year, like I saw with first time home buyers 2 years ago, are having to stretch above their comfort payment level. This doesn’t mean they don’t qualify for a home loan, but the total payment is more than they anticipated. However, for 2014 move-up buyers were in the market. It will be interesting to see what happens next year.
Organic housing sector growth in 2015, will require significant wage growth to balance the skewed MP2MI equation for both new and existing homes. Simply said, the low wage job recovery cycle has been hobbling housing and we will not see a healthy housing market until we see a higher paying jobs market. One possible bullish note for next year is that the job gains so far this year have been on average a higher than expected 230,000 per month. Interestingly, job gains really began to pick up once the federal unemployment benefits expired. More importantly, higher wage jobs are making up a bigger part of new jobs. We are now seeing approximately 58% to 42 % higher wage to lower wage new jobs. If this trend continues and if we get up to 67% higher wage jobs, we should start to see a more mortgage buyers in the housing market because these wage earners should be able to afford the total payment, especially in the more affordable areas of the country.
Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com