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Housing Market Recap (excerpted from Gate House’s weekly note to clients) July 19, 2023

Wednesday, July 19, 2023

It’s a busy week for housing data. The National Association of Homebuilder’s (NAHB) reported its sentiment index rose by 1 point to 56, the seventh straight month of gains and the highest level since June 2022 (> 50 is considered positive) as low supply of existing homes for sale continues to drive demand for new construction. Housing starts and building permits are due out, along with existing home sales, jobless claims, and leading U.S. economic indicators.

The Federal Reserve released the results of its consumer survey, revealing that the rejection rate for people applying for credit jumped to 21.8% in June, up from 17.3% in February, the highest level in five years. Credit applications it should be noted, however, have fallen overall the past 12 months to 40.3%, the lowest since October 2020 and down from 40.9% in February, according to the survey. Nevertheless, big banks have said they are setting aside additional capital for loan losses as credit card balances rise and delinquency rates on credit cards and other retail loans continue to rise. Broken down, the Fed survey revealed the rejection rate for auto loans increased the most, to 14.2 percent from 9.1 percent in February, a new series high. For credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications, rates rose to “21.5 percent, 30.7 percent, 13.2 percent, and 20.8 percent, respectively.”

Even as the 30-year fixed-rate mortgage neared the 7% mark, preliminary results from the University of Michigan survey indicate consumer sentiment rose 13% in July, which if it holds would be the second straight month of improvement and the largest over-month gain since 2006 and its highest level since September 2021.

Black Knight’s analysis suggests a bifurcated market. Andy Walden, vice president of enterprise research and strategy, said “The housing market has been reheating as we approach the traditional tail end of the homebuying season.” But credit continues to tighten, Waldron said, and in a constrained market, which has purchases taking a larger share of a reduced origination market, “continued economic uncertainty, tightening credit and affordability concerns have all helped to skew the market toward higher-credit borrowers. In fact, the average credit score among purchase locks hit a record high in June.”  “Likewise, the average purchase price rising for the seventh straight month while the average loan amount remained flat suggests lower loan-to-value ratios as well” Waldron said.

According to an analysis by Realtor.com, in this interest rate environment and with the Fed likely to tighten further, they expect home sales to decline by 15.8% for the year, as many potential buyers wait for rates to drop before they are willing to look for a new home. Realtor.com says would-be sellers with existing low rates on their mortgages are holding off, unwilling to enter a market where they would pay a higher rate.  Realtor.com also changed its outlook for prices: After forecasting a price rise earlier this year, they now expect a gradual fall in the second half of the year.

Also of note, issuance of agency mortgage-backed securities rebounded strongly in the second quarter of 2023 following nine consecutive quarters of slumping production.