Mortgage activity slowed significantly last week, pulling the Mortgage Bankers Association’s (MBA’s) Market Composite lower after three weeks of gains. The Index, a measure of loan application volume, decreased 9.0 percent on a seasonally adjusted basis during the week ended January 27. It did, however, increase 6 percent on a non-seasonally adjusted basis. The Refinance Index dropped 7 percent from the previous week and was 80 percent lower than the same week one year ago. The refinance share of applications dipped to 31.2 percent from 31.9 percent the previous week. [refiappschart] The same pattern prevailed for home purchase loans. The seasonally adjusted Purchase Index decreased 10 percent but was up 7 percent before adjustment. The Index is 41 percent lower than it was during the same week in 2022. [purchaseappschart] “Mortgage rates declined for the fourth straight week and have now fallen almost 40 basis points over the past month, according to Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Treasury yields were higher on average last week, while mortgage rates decreased, which was a sign of a narrowing spread between the two, he said. “The spread between mortgage rates and the 10-year Treasury has been abnormally wide since early 2022. Further narrowing of that spread is expected to put downward pressure on mortgage rates in the coming months. Overall application activity declined last week despite lower rates, which is an indication of the still volatile time of the year for housing activity. Purchase activity is expected to pick up as the spring homebuying season gets underway, bolstered by lower rates and moderating home-price growth. Both trends will help some buyers regain purchasing power.”
As rates spiked and sales contracted at the fastest pace in decades last year, we knew the post-pandemic surge in home prices was set to reverse. By the middle of 2022, the average forecast saw the annual pace of home price appreciation falling back toward historic norms with prices losing a bit of ground on a monthly basis. That is exactly what has been happening. Both the FHFA and S&P Case Shiller publish home price indices (HPIs) each month. There's a bit of a lag in the data (today's is for the month of November), but collectively, they're considered the most official record of home price changes. Case Shiller's index focuses on 20 major metro areas. As such, it tends to be more volatile--zooming to the higher highs and lower lows than the more stable FHFA version. Case Shiller shows a 0.5% decline in November, which was actually a bit less of a drop than forecast. FHFA's monthly numbers were down even less (-0.1%) after holding steady in October. This is perhaps worth some small amount of reassurance given November's prices should have been affected by a sharp spike in rates in September. In any event, the chart above gives us the impression that the worst is behind us in terms of monthly price declines. The takeaway from the long term chart of year-over-year change is even more upbeat. It actually shows price gains remaining higher than the past 16 years according to FHFA and among the highest levels of the past decade according to Case Shiller.
For those in the housing and mortgage market, there's certainly been a shift in the tone over the past few weeks. I can't speak for everyone in that market, but in daily conversations with mortgage originators, the topic of an uptick in home sales is coming up for the first time in quite a while. To be clear, I don't think anyone thinks that we're experiencing some massive reversal of fortune. We're not quickly going back to near-all-time high sales pace seen at times during 2020 and 2021. Rather, the hope is that we're finally seeing an end to a fairly depressing slide that took sales levels to near-all-time lows. The just-released Pending Home Sales data from the National Association of Realtors is the latest in a small collection of data that quantifies the potential shift. In this case, words are probably worth more than pictures because we can say things like "pending home sales moved up at the fastest pace since October 2021." The chart may be a bit anticlimactic by comparison, but it's better than a sharp stick in the eye. “This recent low point in home sales activity is likely over,” said NAR Chief Economist Lawrence Yun. “Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”
The Census Bureau's regularly scheduled monthly report on New Home Sales was released this morning. The annual pace of 616k was right in line with the median forecast of 617k. This is technically an improvement, but only because the previous month was revised down to 602k from 640k. In the big picture, it doesn't much matter if today's data is a bit better or worse than last month's. It's unequivocally better than it was on several occasions in the middle of 2022 when the annual pace was closer to 550k. If sales can avoid revisiting that territory, 550k will increasingly look like a long-term floor in the bigger picture. If sales numbers are finally bouncing, some credit could go to inventory finally doing the same. After being squeezed down to all-time lows in early 2020, new home inventory slowly began to grow. It didn't eclipse 2019's highest levels until several months into 2022. We can credit the combination of sharply higher rates and prices for sapping demand and leaving excess inventory on the shelf for builders. Here too, the chart looks like it wants to bounce (but against a ceiling for inventory as opposed to a floor for sales numbers). It's a bit too soon to declare victory. Whereas 2022 was clearly a year for rising interest rates, it remains to be seen how quickly that trend will be reversed in 2023. If inflation continues to fall and the economy softens, rates can come down faster. This isn't the only input for New Home Sales of course, but when the average 30yr fixed rate was well over 7%, it was certainly keeping more prospective buyers on the sidelines versus the mid-to-low 6's seen over the past 2 months.
Mortgage loan activity posted a third straight gain during the week ended January 20 . The Mortgage Brokers Association (MBA) said its Market Composite Index, a measure of mortgage loan application volume, increased 7.0 percent on a seasonally adjusted basis from one week earlier and rose 1 percent on an unadjusted basis. The week’s results included an adjustment to account for the observance of Martin Luther King Day. The Refinance Index moved 15 percent higher but was 77 percent below activity during the same week one year ago. That share of the week’s applications increased to 31.9 percent from 31.2 percent the previous week. [refiappschart] The seasonally adjusted Purchase Index gained 3 percent and was 1 percent higher on an unadjusted basis. Activity was 39 percent lower than the same week one year ago. [purchaseappschart] “Mortgage rates declined for the third straight week, which is good news for potential homebuyers looking ahead to the spring homebuying season. Mortgage rates on most loan types decreased last week and the 30-year fixed rate reached its lowest level since September 2022 at 6.2 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall applications increased with both gains in purchase and refinance activity, but purchase applications remained almost 39 percent lower than a year ago. Homebuying activity remains tepid, but if rates continue to fall and home prices cool further, we expect to see potential buyers come back into the market. Many have been waiting for affordability challenges to subside.”
Existing home sales fell back for the 11th straight month in December according to the National Association of Realtors® (NAR) The month’s sales of pre-owned single-family houses, townhouses, condominiums, and cooperative apartments were at a seasonally adjusted annual rate of 4.02 million units. This is down 1.5 percent from November’s activity and 34.0 percent lower than in December 2021. Single-family home sales declined by 1.1 percent to a seasonally adjusted annual rate of 3.60 million from 3.64 million in November and were down 33.5 percent from the previous year. Existing condominium and co-op sales came in at a seasonally adjusted annual rate of 420,000 units, a decline of 4.5 percent and 38.2 percent from the two earlier periods. [existinghomesdata] The December results were slightly better than expected. Analysts polled by Econoday and Trading Economics each came in with a consensus estimate of 3.97 units. For the entirety of 2022 there were 5.03 million existing homes sold. This was 17.8 percent fewer than in 2021, as last year’s rapidly escalating interest rate environment weighed on the residential real estate market. “December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” said NAR Chief Economist Lawrence Yun. He said, however, he expects sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.
In a single moment, the fees for a vast majority of new mortgages in the US have changed. In some cases, the changes are drastic, both for better and worse. Let's break it down. What do you mean by "fees/costs?" This refers to Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (the "agencies"), the two entities that guaranty a vast majority of new mortgages. LLPAs are based on loan features such as your credit score, the loan-to-value ratio, occupancy (owner vs non-owner occupied homes), and most recently, your debt-to-income ratio What lenders/loans does this apply to? Any loan guaranteed by one of the agencies regardless of the lender. This is MOST loans in the US. Examples of loans that wouldn't be affected would be FHA/VA as well as certain jumbo and specialty products. "Non-conforming" loans are not impacted by this as they are not guaranteed by the agencies. A common example of a non-conforming loan would be a jumbo loan from a retail bank or credit union. When does this take effect? This applies to loans that are guaranteed by the agencies starting May 1st, 2023. That means many lenders will begin to implement the changes in March/April. What changed, in a nutshell? The effective penalty for having a credit score under 680 is now smaller than it was. It still costs more to have a lower score. For instance, if you have a score of 659 and are borrowing 75% of the home's value, you'll pay a fee equal to 1.5% of the loan balance whereas you'd pay no fee if you had a 780+ credit score. But before these changes, you would have paid a whopping 2.75% fee. On a hypothetical $300k loan, that's a difference of $3750 in closing costs.
On top of the solid report on mortgage volume earlier today, comes another hopeful report from the construction industry. The National Association of Home Builders (NAHB) says builder confidence in the new home market has improved for the first time in January after 12 straight months of declines. The NAHB/Wells Fargo Housing Market Index, a measure of builder confidence rose 4 points to 35, an increase which NAHB’s chief economist Robert Dietz said was due in part to a modest drop in interest rates. He added, however, that builder sentiment “remains in bearish territory as builders continue to grapple with elevated construction costs, building material supply chain disruptions, and challenging affordability conditions.” Derived from a monthly survey that NAHB has been conducting for more than 35 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. All three HMI indices posted gains for the first time since December 2021. The HMI index gauging current sales conditions in January rose 4 points to 40, the component charting sales expectations in the next six months increased 2 points to 37 and the gauge measuring traffic of prospective buyers increased 3 points to 23.
loan application volume, increased 27.9 percent on a seasonally adjusted basis The Refinance Index rose 34 percent week-over-week but remains 81 percent below its level during the same week one year ago. Refinance applications made up 31.2 percent of those submitted during the week compared to 30.7 percent during the week ended January 6. [refiappschart] The seasonally adjusted Purchase Index rose 25 percent from one week earlier and was 32 percent higher on an unadjusted basis. Purchasing activity was down 35 percent on an annual basis. [purchaseappschart] “Mortgage application activity rebounded strongly in the first full week of January, with both refinance and purchase activity increasing by double-digit percentages compared to last week, which included the New Year’s holiday observance,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Despite these gains, refinance activity remains more than 80 percent below last year’s pace and purchase volume remains 35 percent below year-ago levels .” Added Fratantoni, “Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall. As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers.” Other data from MBA’s Weekly Mortgage Applications Survey: Loan sizes increased week-over-week with the average for all loans growing from $349,900 to $358,100 and purchase loan sizes rising to $401,300 from $389,000. The FHA share of total applications decreased to 13.0 percent from 13.4 percent and the VA share from 13.2 percent to 11.8 percent. The USDA share of applications remained at 0.6 percent. The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances decreased to 6.23 percent from 6.42 percent, with points falling to 0.67 from 0.73. The rate for 30-year FRM with loan balances exceeding the conforming limit of $726,200 ticked down to 6.08 percent from 6.09 percent, with points easing to 0.40 from 0.66. Thirty-year FRM backed by the FHA had a rate of 6.26 percent with 1.05 points. The prior week the average was 6.39 percent, with 1.03 points. The average contract interest rate for a 15-year FRM dropped to 5.58 percent from 5.94 percent, and points declined to 0.54 from 0.62. The average rate for 5/1 adjustable-rate mortgages (ARMs) declined 6 basis points to 5.31 percent from 5.37 percent while points rose to 0.74 from 0.72. The ARM share of activity decreased from 7.4 percent of total applications to 6.6 percent.
Overall mortgage application activity returned to pre-holiday levels during the first week of the new year. Lower interest rates bolstered refinancing and the Mortgage Bankers Association said its Market Composite Index, a measure of mortgage loan application volume, increased 1.2 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index was up 48 percent compared to its December 30 level. The Refinance Index rose 5 percent from the previous week but was 86 percent lower than the same week one year ago. Refinancing accounted for 30.7 percent of applications during the week, up from 30.3 percent the previous week. [refiappschart] The seasonally adjusted Purchase Index dipped 1.0 percent compared to the prior week but was 47 percent higher on an unadjusted basis week-over-week. Purchase loan activity was 44 percent lower than the same week one year ago. [purchaseappschart] “Mortgage rates declined last week as markets reacted to data showing a weakening economy and slowing wage growth,” Joel Kan, MBA’s Vice President and Deputy Chief Economist said. “All loan types in the survey saw a decline in rates, with the 30-year fixed rate falling to 6.42 percent. Purchase applications continued to be hampered by broader weakness in the housing market and declined slightly over the week, with the index slipping to its lowest level since 2014. There was an increase in refinance activity as a result of the 16-basis-point decline in rates, as both conventional and government refinance applications increased. However, the overall pace of refinance applications was lower than November and December’s 2022 averages, and over 80 percent lower than a year ago. Refinances were about 30 percent of all applications last week — well below the past decade’s average of 58 percent.”