Morning Report: Housing recession

Vital Statistics:

 LastChange
S&P futures4,132-1.50
Oil (WTI)93.77-0.01
10 year government bond yield 3.09%
30 year fixed rate mortgage 5.68%

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

Mortgage Applications hit a 22-year low last week as purchases declined 1% and refis fell 3%. “Mortgage applications continued to remain at a 22-year low, held down by significantly reduced refinancing demand and weak home purchase activity,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Last week’s purchase results varied, with conventional applications declining 2 percent and government applications increasing 4 percent, which is potentially a sign of more first-time homebuyer activity. The average purchase loan size continued to trend lower, as purchase activity at the high end of the market is weakening.”

Durable Goods orders were flat in July, according to Census. This is further indication that the rate increases of earlier this year are beginning to be felt. Durable Goods shipments rose 0.4%. Slowing orders are an indication of declining demand, which should help alleviate some of the supply chain issues that are driving up prices.

Home prices are beginning to fall. Part of this is due to seasonality (prices generally peak in June), however they have gone up in such a straight line that a correction is probably due. “House prices are rolling over,” says Mark Zandi, chief economist at Moody’s Analytics. “They’re going from straight north to going sideways and, I expect, would be going south in the not too distant future, certainly by this time next year.”

The hottest markets in the Southwest, Southern California, the Mountain states and Florida could be the most vulnerable. Many of these places saw 30% price appreciation over the past year. “These most juiced-up markets … could see 10% to 15% declines, and that’s assuming no recession,” says Moody Analytics’ Zandi. “If we get into a recession, then we’re talking 15%, 20%. I could even see some markets down 25% from their peak.”

FWIW, I think the supply – demand imbalance will prevent a nationwide price decline of any significance. We aren’t going to experience another 2006 – 2010 time period. This is more of a “buyer’s strike” than a “forced selling” event.

Pending Home Sales fell 8.6% in July to an index level of 91 (where 100 – the 2001 market). “Contract signings to buy a home will keep tumbling down as long as mortgage rates keep climbing, as has happened this year to date,” said NAR Chief Economist Lawrence Yun. “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize. Home sales will be down by 13% in 2022, according to our latest projection,” Yun added. “With mortgage rates expected to stabilize near 6% and steady job creation, home sales should start to rise by early 2023.”

Between falling home sales and declining mortgage applications, we are in a housing recession that should probably last until at least the Spring Selling Season next year.

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