The Mortgage Corner
November existing home sales in November tumbled 6.1 percent, the biggest drop since July 2010, down to a seasonally adjusted annual rate of 4.93 million. New-home sales also fell slightly—probably for the same reason. Why? There were plenty of conjectures.
“While the headlines often point to first-time buyers’ reluctance to enter the market as a catalyst to the sluggish housing recovery, today’s report shows inventory needs to climb before it can support more interested buyers,” Quicken Loans Vice President Bill Banfield said. “As homeowners gain trust in the economy, they will be more comfortable leaving their current mortgage and entering the market, thus driving up inventory to support further demand.”
Existing-home inventories increased 2 percent, but are still at post-recession lows. So this makes sense, as refinancing levels have to pick up as well, for homeowners to be able to move up, or downsize their dwellings as they approach retirement. New-home inventories rose slightly from 5.7 to 5.8 months’ supply at the current sales rate.
But it’s also the winter season, with all the obstacles that winter weather brings. And sales dropped to their lowest annual pace since May (4.91 million) but are above year-over-year levels (up 2.1 percent from last November) for the second straight month, says Calculated Risk.
The NAR’s chief economist Lawrence Yun thought it might have something to do with the stock market, also. “Fewer people bought homes last month despite interest rates being at their lowest levels of the year,” he said. “The stock market swings in October may have impacted some consumers’ psyches and therefore led to fewer November closings. Furthermore, rising home values are causing more investors to retreat from the market.”
So why are for sale inventories still so low? The main reason may be credit tightness, in spite of record low mortgage rates. Both mortgage refinancing and purchase applications are still too low for this stage of the housing recovery. This is while the 30-year fixed conforming rate is down to 3.50 percent for a 1 point origination fee.
When will prospective homebuyers become more trusting of the housing market? It may already be happening. Economist Robert Shiller of the Case-Shiller Home Price Index recently reported that homeowners are becoming more optimistic again, with their latest survey now done by Dodge Data & Analytics reporting that homeowners now see housing values appreciating at +5 percent in future years.
“On average over the next 10 years,” asked Professor Shiller of a home owning sample survey, “how much do you expect the value of your property to change each year?” In 2004, a boom year, the average answer was a gain of 12.6 percent, but in succeeding years the figure began to decline, bottoming at 4 percent in 2012. The expected gain rose to 4.2 percent in 2013 and 5.5 percent in mid-2014.”
Are we returning to bubble territory with such low interest rates, as back in 2005? No, according to Dr. Shiller. “…both our data and that of the Chicago Mercantile Exchange show higher expectations than they did a couple years ago. But these new expectations are hardly wild: If inflation ran at 2 percent a year, the Federal Reserve’s target, the expected appreciation in housing would be an inflation-corrected 2 percent to 3.5 percent a year. So at the moment, there is no evidence of extravagant bubble thinking.”
Still, there are many homes either with little or no equity, or in outright foreclosure, especially in the older Judicial Foreclosure states of the Midwest and East—some 5 million at last count. And such a ‘shadow’ inventory of distressed housing can only be reduced with further price appreciation, and more job creation. It does look like that might happen in 2015, so stay tuned!
Harlan Green © 2014
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