Spring is near and we are about to hit the most heated months of the year for the housing market and the key mortgage purchase application data. A few key points to keep in mind:
1. The most crucial period for the mortgage purchase application data is from the 2nd week of January to the first week of May. These are the seasonal heat months. Post May, the headline volume traditionally falls because purchase application lead to forward demand and the majority of this application drive ends in May.
2. The year over year prints, not the weekly prints, are the best indicator of demand. As long as you see headline year over year growth, you can conclude that the market is experiencing real growth, not just short term fluctuations. With that said lets take a look at what is going on in 2017.
Higher rates have impacted demand but nothing like what occurred during the Taper spike in interest rates in 2013. The taper spike lead to negative prints in this data for 2014. Remember that in 2015 the bond market sold off and this impacted the rate of growth in this index. However, we still had the highest demand for home sales and for mortgages in 2015. In 2016, during the heat months we had 25% + year over year growth in the purchase application data.
So far this year we are seeing prints of 4%, 3%, 2% and 0.01%, in year over year growth.
In 2017, the higher interest rates have not lead to a negative trend in the purchase application data. However, the rate of growth has slowed by 20%. But remember that 25% + growth doesn’t mean a 25% increase in sales. The 25% year over year growth in mortgage demand translates to just a couple of hundred thousand more sales in existing homes. We ended 2016 slightly higher (at 5.45 million units sold) compared to the previous year. But, we had more mortgage buyers and falling cash buyers, both of which are indicators of organic growth in this sector. As always perspective matters. Purchase application data is only back to 1998 levels.
While there hasn’t been a negative trend in growth in the housing sector, higher interests rates have impacted the rate of growth.
For existing home sales in 2017, I expected flat to negative growth. I predicted a range of 5.15 to 5.45 million sales with a number of higher mortgage buyers and a lower number of cash buyers compared to last year. It is interesting that the last existing home sales report showed cash buyers at 23% of the market while existing home sales hit a cycle high. That was still a very strong cash print. I expect 16%-19% of the market to be cash in the 2017. But if cash buyers continue to hold over 20% of the market and mortgage demand grows just a little, then we should see a cycle high in existing homes sales and mortgage demand. However, if the cash buyer index went back to a teenager print and we see this below 5% growth in mortgage demand then we could see flat to negative existing home sales for 2017. I wouldn’t read too much into that if it happens, with our demographics this is where we should be. If cash buyers were back to 10% of the market which is the historical norm, then we wouldn’t have had too many prints over 5,000,000 in this economic cycle.
For January we had a good existing home sales print followed by a softer print for pending home sales.
I recommend not giving too much credence to these month to month prints. The trend is you friend. If we get any print above 5.45 million, then I would expect 6 million in total home sales (existing + new home sales) once again. New home sales tend to get impacted more than existing home sales when there is a rate rise because it’s more heavily weighted toward mortgages buyers. Don’t read too much if existing home sales fall this month, it’s coming off a cycle high and mortgage demand is still growing in 2017.
On mortgage rates and the 10 year yield
Today’s 2.55% print is touching the higher band of a key resistance area. For 2017 I expected yields to stay within the same 1.60% – 3% channel for most of the year. We have been stuck in a range of 2.27% – 2.62% for some time now. Jobs Friday is coming up and w ADP printed a 298,000 number today.
If we get a blowout jobs print then we might be able to break above 2.62% in rates. However, we would also need to see a close above 2.62% with next day follow through in order to test that key 3% level. Time will tell. I would keep an eye out on copper, oil and steel as cracks are showing up on the reflation trade.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his own facebook page https://www.facebook.com/Logan.Mohtashami