Morning Report: Homes are still affordable, but for how long?

Vital Statistics:

 

Last Change
S&P futures 2732.75 -6.85
Eurostoxx index 362.55 -0.95
Oil (WTI) 62.68 -0.42
10 year government bond yield 3.20%
30 year fixed rate mortgage 4.96%

 

Stocks are lower as voters head to the polls for Midterm elections. Bonds and MBS are flat.

 

Regardless of what your politics are, I think everyone will agree that it will be refreshing to not get spammed everywhere with political ads, starting tomorrow.

 

The Midterm elections will hold the press’s attention today, however they won’t have much (if any) of an impact on markets. Expect Democrats to take the House and a few governorships and Republicans to hold the Senate. This means gridlock for the next two years, which is good news for stocks and bonds.

 

The ISM Non-Manufacturing Index slowed a touch in September, but was still pretty strong. New Orders rose while employment was a drag on the index. Employment issues referred to the labor supply, with comments like: “Low unemployment causing team members to leave for higher wages in other businesses and industries” and “Challenging to replace vacant positions.” Expect to see more wage inflation ahead. Tariffs are still worrying some respondents and construction is experiencing cost push inflation. Retailers are reporting strong traffic and expect it to continue through the rest of the year. All of this adds up to a probable hike in December.

 

Rising mortgage rates have cut the size of the refinanceable pool of mortgages to 1.85 million, a 56% drop from the beginning of the year. Overall, there apparently were 6.5 million borrowers in total who had the opportunity to refinance during the ZIRP years that missed the boat. Despite the concerns about affordability, it takes 23.6% of median income to make the monthly payment on the average house which is lower than the pre-bubble benchmark of 25.1%. (Note: I did a deep dive into that metric earlier this year in the Scotsman Guide: Homes are Not Overpriced.) Black Knight estimates that an additional 50 basis points rise in the mortgage rate will push the monthly payment metric above the historical average, even if home prices don’t rise further.

 

refinance candidates

 

The residential homebuilding sector has had a lot of headwinds to deal with, from labor shortages, to rising materials prices and also the lack of buildable lots. The issue is that in the areas where demand is highest (places like Seattle and SF) there are geographical issues that make building out hard. On the other hand, in places like the Midwest, where there is less demand, there is plenty of land available.

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