Doctor’s Mortgage – Economic Update: That Darn Supply


Keeping you updated on the market!
For the week of

January 30, 2017


That Darn Supply

Whenever talk turns to home sales, you can be sure it will also turn to home supply, and for good reason.

Existing home sales dropped 2.8% to a lower-than-expected 5.49 million on an annualized rate. Most market watchers were expecting better (including us). One positive in the sales data was November sales, which were revised up to 5.65 million on an annualized rate.

December sales had trouble gaining traction for the same reason they’ve had trouble gaining traction in most down months — supply.  The NAR reports the number of homes for sales fell 11% for the month to 1.65 million. At the current sales pace, supply, at 3.6 months, is at the lowest level since 1999. If you don’t have a lot to sell, it’s hard to sell a lot.

Interestingly, many sellers were unable to exploit their advantage. The median price of an existing home was down 0.9% to $232,200 in December. If demand holds steady and supply drops, prices should rise. (It’s possible demand also dropped on higher interest rates, though purchase-mortgage activity suggests otherwise.) Of course, we all know that housing markets are local markets, and what holds for the national market won’t necessarily (and likely won’t) hold for any particular local market.

Investment is another variable impacting home supply. Over the past five years, a record number of homes, most notably single-family homes, have been converted to rentals. We’ve seen this conversion occur on an unprecedented institutionalized scale, with large investment firms buying hundreds of thousands of homes. What’s more, most of these conversions have occurred at the lower end of the market, thus driving up prices for what would be starter homes for first-time buyers.

Increased construction activity helps, but it’s not helping enough. Housing starts were up 11.3% to 1.226 million on an annualized rate last month. But the surge was confined to multi-family starts, which jumped 57%. The more important single-family category actually declined 4%.

Though home constitution has trended higher in recent years, it hasn’t trended high enough. The historical annual average for starts is around 1.5 million. NAR economist Lawrence Yun has mentioned that excess regulation — concerning land use in particular — has held construction in check.

Love him or hate him (because there is no middle ground), but President Trump has vowed to reduce  business regulation across the board. Should Trump follow through, we should see a pick-up in new-home construction.





Date and Time
Consensus Analysis

Pending Home Sales Index


Mon., Jan. 30,Tues.,

Jan. 31,
9:00 am, ET

1.0% (Decrease)

5% (Annualized Increase)

Important. After a drop in December, the index should trend positively on more stable interest rates.

Federal Reserve FOMC Meeting

Wed., Feb. 1,

2:00 pm, ET

Federal Funds Rate:


Important. Interest rates should hold, but the Fed will provide additional insight on the outlook for interest rates.

Employment Situation


Fri., Feb. 3,

8:30 am, ET

Unemployment Rate: 4.7%

Payrolls: 150,000 (Increase)

Important. Job growth has settled into a sustainable monthly rate, though it’s unclear whether this will lead to multiple interest-rate increases.


All Quiet on the Mortgage Front

Perception has given way to reality. Until now, market participants acted on the perception of a Trump presidency. Today, they act on the reality.

Reality is more grounded than perception. For this reason, we expect the interest-rate volatility that we have experienced in the weeks following the November elections to subside. Since January, that’s been the case.

We’ve seen quotes on a 30-year fixed-rate mortgage (for prime conventional and government loans) settle into a 4.125%-to-4.25% range. This doesn’t surprise us. For the past month, we thought this range could hold at least until the presidential inauguration. Now that the inauguration has come and gone, we wouldn’t be surprised to see the range hold until Federal Reserve officials meet for the second time in 2017, which will occur in mid-March. (The first meeting will occur next week, but no one expects an interest-rate increase to be forthcoming.)

Market participants appear to be adjusting to the new normal of 4%-plus quotes on a 30-year loan.  Mortgage activity is picking up, and that includes refinance activity, which was up 0.2% last week. This isn’t bad when you consider borrowers had the opportunity to lock in a 30-year loan below 3.5% only six months ago.

We’re encouraged by the sustained level of purchase activity. The MBA reports that purchases were up 6% last week. The purchase index is at a level last seen in June 2016. Purchase activity continues to show surprising resilience in a rising-rate environment. This bodes well for the sales outlook for 2017.

Many market commentators have been more concerned about rising rates than we have. Yes, interest rates are a variable that influences affordability, but so do other variables: job prospects, wage growth, business outlook, business and consumer confidence. Because most of these other variables continue to improve, we see no reason that housing and lending activity won’t continue to improve as well.
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