New Home Sales, Mortgage Applications

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses new home sales and mortgage applications.

• The recent increase in mortgage rates continues to weigh on new home purchases. The Mortgage Bankers Association released its weekly survey of mortgage applications this morning. The purchase component eased 2.1% this week relative to last and has eased by more than 2% in four of the last 6 weeks. This data is seasonally adjusted so the downward trend in applications reflects the strong upward increase in mortgage rates over the same time frame. Rates eased modestly this week in daily trading and are likely to show a moderate decline in tomorrow’s release by Freddie Mac.
• On a more positive note, sales of new homes jumped 8.3% from May to June to a seasonally adjusted annualized rate of 497,000, in part due to a strong increase in June, but also due to a moderate downward revision in May. Sales of new homes have increased for three consecutive months.
• Sales of new homes are hamstrung by low inventories, though. The months supply of new homes eased to 3.9 in June from 4.2 in May, and 4.8 in June of 2012. A figure of 6.5 would be more indicative of a market in balance.

• Low inventories relative to strong demand is pressing up on new home prices, which rose 7.4% over the 12-month period ending in June to $249,700; the 12th consecutive year-over-year increase. The median existing home price was 16.3% lower at $214,700, above the historical average spread of 12.3%, suggesting that existing homes are relatively cheap by historical standards.
• New sales continue to chug along, which is important for new construction and job creation. However, mortgage rates are beginning to have an impact on home purchases. Some of this impact may prove transitory as buyers re-set their expectations and more sellers bring much needed inventories to the market ahead of higher rates. Limitations from Basel III on speculative building and access to capital markets have hampered smaller builders from expanding production to ease supply shortages. Higher rates and prices will erode affordability going forward, though, weighing on sales unless lenders expand originations to take advantage of higher rates and reduced risks in the lending environment.