The equity market’s quick sprint out of the gate since the New Year seems to have tripped over a rock and new home sales seem to be on the same downward path. The beginning of January experienced positive growth in the markets and upbeat predictions surrounding the economy. However, in the past week, events and expectations have shifted in the opposite direction quickly. Since the beginning of the year, the Dow Jones Industrial Average has plunged 4.39 percent and the S&P 500 has sunk by 2.93 percent, as of the end of January.
This past Wednesday, the Federal Reserve announced a further cut back on its stimulus efforts by another $10 billion dollars, sighting the economy looks strong enough to expand on its own. This lack of availability of liquidity to the emerging markets is taking a toll on their respective currencies, resulting in a flight to quality for most investors. These larger macro-economic events are spilling over into housing and affecting U.S. consumers that are in the market to purchase a house.
New home sales have continued to deteriorate considerably over the last few months due to tight credit qualifications and upward pressure on prices. Traditionally the new home sales market has been composed of 40 percent first time home buyers and 10 percent cash investors. This composition has evolved now to 27 percent first time home buyers and 30 percent cash. As new home prices increase, this inevitably knocks lower income consumers out of the market while catering to those on the high-end.
The FHA product that many first time home buyers utilize has become more expensive, further keeping first time home buyers out of the market. Qualifications have also become more rigorous. Mark Hanson, a California-based housing analyst commented, “In reality, new home sales to me is simply the best gauge of ‘end-user’ demand, which of course is hugely important. But the persistent divergence between new sales and existing highlight just how powerful the ‘transitory’ investor trade has actually been.”
Recently reported new home sales in December fell more than expected, dropping 7 percent to a seasonally adjusted annual rate of 414,000 units. Additionally, November’s new home sales were revised down by 19,000 units. Some economists believe part of this drop reflects a drag due to the cold weather that most of the country experienced last month. On a positive note, new home sales for December 2013 were up 4.5 percent from December 2012.
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Weak residential mortgage origination results for the fourth quarter were recorded by Wells Fargo and JP Morgan Chase. Therefore analysts expectations for 2014 are being revised downward. The Mortgage Bankers Association (MBA) lowered its mortgage origination projections for 2014 by $57 billion to $1.12 trillion. Mike Fratantoni, chief economist for MBA, commented, “Despite an economic outlook of steady growth and a recovering job market, mortgage applications have been decreasing—likely due to a combination of rising rates and regulatory implementation, specifically the new Qualified Mortgage Rule.” A large portion of the reduction is refinance applications which are now estimated to decrease 60 percent this year from last year.
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As 2013 winds to a close, economic conditions have made large strides since the beginning of the year. 2013 Definitely had its fair share of headwinds surrounding the economy, job market and housing market. Stock markets experienced strong gains the past few days, reaching new highs. Home prices have increased and foreclosure rates are on the decline. One thing holding the housing market back however is home mortgage applications.
As the Federal Reserve slows its printing press in light of the taper, rates are likely to increase, meaning homebuyers will pay more for home loans in the form of mortgage rates and business loans will cost more as well. Current 30-year fixed rates are hovering around 4.57 percent and will probably head higher. Ellen Haberle, an economist at the online real-estate brokerage Redfin commented, “Homebuyers aren’t going to be happy. In the weeks ahead, mortgage rates are likely to reach or exceed 5 percent.” It is important to note these rates are still at historic lows even though they are starting to climb. Analysts believe this is not enough to halt the housing market recovery. “It’s a better economy that gets people to buy houses,” said senior financial analyst at Bankrate.com, Greg McBride.
