Or at least they are trying to…
For the last however many years, housing bears have been scratching to discount the housing market. Today is the beginning of another attempt to declare the housing market is going to be eaten.
July housing starts were released this morning showing a 7% decrease. Does this mean that hosing start will continue to decline over 7% month over month? Well, it’s too early to say but that is highly unlikely. What we do know is that builders have put up around 1.5 million units over the last 12 months. Now, some say that we are pushing toward a repeat of the 2008 housing crisis. But if we hop back to 2006, we would find ourselves in a very different situation. In 2006, builders put up over 2 million units and quickly realized that demand at the price range they were expecting was less than half of that 2 million. Today, people are looking at the market and saying that homes are staying on the market longer and that must indicate a quick slowdown. However, they are comparing that to last year while we had the biggest inventory shortage in the country’s history and houses were flying off the shelf. There were so many people looking for houses that Zillow was the US’ biggest search engine behind Google! And with the 1.5 million starts and the slightly increased time on the market, home values continue to rise – not as fast as 12 months ago but far away from declining.
The other piece that bears are biting at is the YoY decline in mortgage applications. Mortgage apps are down 19% from last year but there are some things to consider. One is that last year, refinance applications far outweighed purchases, so looking at mortgage applications is a flawed metric to base the hosing industry on. Another is that cash buyers rose from 20% in 2020 to 30% as of July 2021 – another huge decrease in mortgage applications. And again, just because the purchase market is slower than last year does not mean that we are out of a record inventory shortage.
We will continue to follow housing reports over the next few months and keep you informed before forming a final opinion.
Mortgage Backed Securities are down 9bps so far today. Like we talked about on Monday, the Fed has a couple of ‘super doves’ that think the MBS taper should start sooner rather than later. Remember that when it comes to monetary policy there are essentially two parties – Hawks and Doves. Simply put, Hawks are more concerned with keeping inflation lower while Doves are more concerned with metrics like GDP and especially employment. Because inflation is the enemy of mortgage rates, Hawkish policy typically leads to lower rate and Dovish policy pushes them higher. The Fed is meeting today and will release its minutes later this afternoon. Because of the potential volatility from some of the doves, we are holding a locking bias.