Rising Home Prices & Builder Hesitation

Hello everyone! Can you believe we're already in the final week of Q2 2024? This year is flying by! As we wrap up the first half of the year, there are plenty of new developments to discuss in the mortgage world. Let's dive in and break down the latest trends and updates!

Read time: ~4 minutes

Rates ended FLAT compared to last week, and volatility was LOW. Rates are in the low 7’s for most loan types without paying discount points. Paying discount points can get you in the mid to high 6’s.

Navigating the Evolving Housing Market

The real estate market has been a rollercoaster lately, marked by surprising turns and unexpected dips. In May, we saw existing home sales dip slightly by 0.7% from April, settling at an annual rate of 4.11 million. While this might seem like a minor blip, it pushed the inventory of unsold homes to nearly a two-year high of 1.28 million units. Year-over-year, sales slid by 2.8%, painting a picture of a market that's feeling the strain.

But here’s where it gets interesting. Despite this increase in inventory, home prices reached a record $419,300 in May, a 5.8% rise from last year. How can prices soar when there are more homes available? The answer lies in geography and market dynamics. Many of the new listings are in states like Florida and Texas, where homeowners are eager to escape high insurance premiums, leaving other states with tighter markets and higher prices.

Jessica Lautz from NAR highlights that while inventory is up compared to previous years, it's still relatively low. This scarcity keeps upward pressure on prices, though not at the frenzied pace we saw during the pandemic. Think of it like a balancing act; the market is trying to find its equilibrium after a period of intense fluctuation.

Amidst these dynamics, there's a silver lining for both buyers and sellers. Mortgage rates are expected to dip slightly, according to projections from Fannie Mae, the Mortgage Bankers Association, and NAR. Even a small drop in rates can significantly affect monthly payments, making homes more affordable and potentially boosting market activity.

Looking ahead, the number of home sales is projected to hold steady or even increase slightly from last year, with an average forecast of around 5 million sales in 2024. Lawrence Yun attributes this to job gains, stable mortgage rates, and a release of pent-up inventory from sellers who had been holding back. It's like a spring slowly uncoiling, releasing the tension that has built up over time.

Builder Caution in the Current Market

Builders are navigating today's market with caution. In May, new housing starts fell by 5.5% from April and dropped 19.3% compared to May 2023. This slowdown is driven by uncertainty around interest rates and their impact on demand, causing builders to hesitate before launching new projects.

Despite the decline in new starts, housing completions remained 1% higher than last year, though they did fall 8.4% from April. Building permits also decreased, reflecting a cautious outlook. Zillow's Senior Economist, Orphe Divounguy, highlighted that without clear future interest rate trends, builders are reluctant to commit to new developments.

Homebuilder sentiment dropped to its lowest since December 2023, with the NAHB/Wells Fargo Housing Market Index falling to 43 in June. Persistently high mortgage rates are a significant factor, keeping buyers on the sidelines. Builders also face higher construction loan rates, labor shortages, and a lack of buildable lots, adding to their caution.

In response, more builders are cutting home prices. In June, 29% of builders reduced prices, up from 25% in May, with the average reduction holding steady at 6% over the past year.

Big Week Ahead!!

This week is packed with significant data releases that will wrap up Q2 2024. Here’s a quick overview of what to watch for:

• Tuesday: Consumer Confidence data

• Wednesday: New Home Sales data

• Thursday: Final GDP data for Q1 2024

• Friday: May PCE Inflation data & the Fed Monetary Policy Report

The most anticipated event is the Inflation report on Friday. If inflation spikes, we can expect a negative market reaction and rising rates. Conversely, if inflation drops, it could lead to a market rally and lower mortgage rates.

Additionally, we have 8 Fed speaker events scheduled this week. These speakers are likely to emphasize the need for more evidence of decreasing inflation. The current market sentiment is that the Fed will cut interest rates twice this year, possibly starting in September. If this expectation holds, interest rates should remain stable. However, significant rate drops are unlikely unless we see rising unemployment and a continuous decline in inflation.

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