All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,146	-0.5
Oil (WTI)	81.96	-0.58
10 year government bond yield		3.56%
30 year fixed rate mortgage		6.40%

Stocks are flat this morning as earnings come in. Bonds and MBS are down.

The upcoming week won’t have much in the way of market-moving data, but we will get a lot of housing data with housing starts and existing home sales. Bank earnings (particularly the regionals) will be a big focus. This morning we heard from M&T, which reported better than expected earnings and State Street which disappointed.

Homebuilder sentiment improved a touch in March, according to the NAHB / Wells Fargo Housing Market Index. “For the fourth straight month, builder confidence has increased due to a lack of resale inventory despite elevated interest rates,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Builders note that additional declines in mortgage rates, to below 6%, will price-in further demand for housing. Nonetheless, the industry continues to be plagued by building material issues, including lack of access to electrical transformer equipment.”

“Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%,” said NAHB Chief Economist Robert Dietz. “More buyers looking at new homes, along with the use of sales incentives, have supported new home sales since the start of 2023. And while AD&C loan conditions are tight, there is not significant evidence thus far that pressure on the regional bank system has made this lending environment for builders and land developers worse.”

Today’s homebuyers are exceptionally interest rate sensitive, and most won’t accept a rate higher than 5.5%. The problem is that the typical mortgage rate is about 6.4%. The high rate environment also affects home sellers, who might be inclined to upsize or downsize but find their current mortgage rate is too good to warrant moving.

“Our consulting team has witnessed this across the country, noting that home builders who choose to subsidize buyers’ mortgage rates, bringing the overall rate down below 5.5%, have been achieving the most success. Many of the largest builders in the country have been buying mortgage rates down below 5.0%,” said CEO John Burns and Maegan Sherlock, a senior research analyst, in the report.

Unfortunately, rates need to fall quite a bit lower to start bringing back activity into the mortgage market. “Even if the Fed chooses not to hike interest rates next month, which would likely bring down mortgage rates, the limited supply of homes for sale would remain a major obstacle for would-be buyers,” wrote Daryl Fairweather, chief economist at Redfin, in the report. “Rates dipping below 6% would probably pique the interest of more buyers, but enough homeowners have rates in the 3% or 4% range that we’re unlikely to see a big uptick in new listings.”

Median asking rents fell 0.4% in March to $1,937. A year ago, median asking rent was $1,944. This is after spiking during the COVID-19 pandemic, so it is in some ways just a return of some of the excess froth in the market. Multi-family construction is up, and a lot of units are slated to enter the market. As we have been seeing in the housing starts data, single family is in the doldrums while developers have been building a lot of multi units.

“Rents are falling, but it feels more like they’re just returning to normal, which is healthy to some degree,” said Dan Close, a Redfin real estate agent in Chicago, where the median asking rent in March was 9.2% lower than it was a year earlier. “It’s similar to the cost of eggs. You can say egg prices are plummeting, but what’s really happening is they’re finally making their way back to the $3 norm instead of $5 or $6. Rents ballooned during the pandemic, and are now returning to earth.”

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Filed under: Economy |