January 21, 2019
The downturn in mortgage interest rates that began in November finally has homebuilders feeling better.
Builder sentiment rose 2 points to 58 in January on a monthly index from the National Association of Home Builders. This came after two months of sharp drops in sentiment to the lowest level in more than two years. The index stood at 72 last January. Anything above 50 is considered positive.
"The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment," said NAHB Chairman Randy Noel. "Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months."
Of the index's three components, current sales conditions rose 2 points to 63. Sales expectations over the next six months increased 3 points to 64 and buyer traffic through new home models rose 1 point to 44. Buyer traffic is the only component in negative territory.
Some of the nation's largest public homebuilders reported weak quarterly earnings last week, indicating a slowdown in sales. The CEOs of KB Home and Lennar indicated that high prices had sidelined buyers, especially as mortgage rates rose in the early fall. Now that rates are lower, builders could see renewed demand.
Builders, however, are not lowering prices significantly. There remains a tight supply of homes for sale at the entry level because builders are unable to profit as much on lower-priced homes.
"Builders need to continue to manage rising construction costs to keep home prices affordable, particularly for young buyers at the entry-level of the market," said NAHB chief economist Robert Dietz. "Lower interest rates that peaked around 5 percent in mid-November and have since fallen to just below 4.5 percent will help the housing market continue to grow at a modest clip as we enter the new year."
Regionally, on a three-month running average, sentiment in the Northeast fell 5 points to 45. Sentiment in the Midwest and South both fell 3 points to 52 and 62, respectively, The West saw a 1-point drop to 67.
Monthly housing starts and builder permits were not released Thursday, due to the partial government shutdown. The NAHB estimates that the December government data would show that single-family starts ended the year totaling 876,000 units, a 3 percent gain over the 2017 total of 848,900. The association noted that the slowdown in sales during the fourth quarter has left new home inventories elevated in some markets.
Mortgage Applications Surge as Borrowers Rush to Take Advantage of Lower Rates
Mortgage demand continues to recover sharply. Total mortgage application volume rose 13.5 percent last week, compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index.
That is its highest level since February and came after a 23 percent jump the previous week. Volume was just 0.5 percent lower than a year ago.
Refinance demand drove the gains, with those applications rising 19 percent for the week to the highest level since March. Volume was 11 percent lower than a year ago, when mortgage rates were 42 basis points lower.
The drop in mortgage rates over the past two months has given new life to the refinance market. Still, it is also important to note that a jump in mortgage rates last January caused mortgage demand to drop, so the annual comparisons are now off a lower volume. Refinance volume is still historically low.
"Uncertainty regarding the government shutdown, slowing global growth, Brexit, a more patient Fed and a volatile stock market continued to keep rates from increasing," said Mike Fratantoni, MBA's chief economist. "The spring homebuying season is almost upon us, and if rates stay lower, inventory continues to grow, and the job market maintains its strength, we do expect to see a solid spring market."
Mortgage applications to purchase a home also rebounded 9 percent for the week to the highest level since April 2010. Purchase volume was 11 percent higher than a year ago. Buyers may be jumping in before the start of the usually competitive spring season. They may also be eager to take advantage of the dip in mortgage rates. More inventory came onto the market at the start of the year, and that may also be adding to activity.
"Borrowers with larger loans tend to be more responsive to a given drop in mortgage rates, and we are seeing that so far in 2019," Fratantoni said. "Furthermore, borrowers with jumbo loans are also more apt to take adjustable-rate mortgages as opposed to fixed-rate loans. Thus, it is not surprising to see the ARM share at its highest level since 2014. These borrowers may also feel more confident taking an adjustable-rate mortgage given the expectation of a more patient Fed."
Although it is just one week's read, the jump in purchase demand bodes well for the start of the spring market, indicating strong demand. High home prices were sidelining buyers last spring, and higher mortgage rates last fall only exacerbated the weakness.