All Things in Moderation

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

Mortgage applications decreased 1.4% last week as purchases fell 2% and refis fell 1%. The number contains an adjustment for the Memorial Day holiday. “Mortgage rates declined last week from a recent high, but total application activity slipped for the fourth straight week. The 30-year fixed rate dipped to 6.81 percent, 10 basis points lower than last week but still the second highest rate of 2023,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall applications were more than 30 percent lower than a year ago, as borrowers continue to grapple with the higher rate environment. Purchase activity is constrained by reduced purchasing power from higher rates and the ongoing lack of for-sale inventory in the market, while there continues to be very little rate incentive for refinance borrowers. There was less of a decline in government purchase applications last week, which was consistent with a growing share of first-time home buyers in the market.”

With the debt ceiling deal in place, Treasury is poised to issue more than $1 trillion in short-term debt to keep the lights on. This will push up short term rates at least in the near-term, which won’t be supportive for mortgage rates. MBS spreads continue to hang out at the highest levels since the Reagan Administration.

Another headache for the mortgage industry: All-cash buyers are the highest since 2014, coming in at 33%. With higher rates and home prices more borrowers are opting for FHA loans. FHA loans are back to pre-pandemic levels, while jumbo loans are declining.

“A homebuyer who can afford to pay in all cash is weighing two potential paths,” said Redfin Senior Economist Sheharyar Bokhari. “They can use cash to pay for the home and avoid high monthly interest payments, or take out a loan and pay a high mortgage rate. In that case, they could use the money that would have gone toward an all-cash purchase to invest in other assets that offer bigger returns, which could partly cancel out their high mortgage rate.”

“Buyers who can’t afford to pay in all cash also have two potential—but different—paths,” Bokhari continued. “They can avoid a high mortgage rate by dropping out of the housing market altogether, or they can take on a high rate. That discrepancy is the reason the all-cash share is near a decade high even though all-cash purchases have dropped: Affluent buyers have the choice to pay cash instead of dropping out of the market.” 

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