We weren’t terribly surprised by the recent home-sales numbers, given recent housing and lending trends.
The pending home sales index has trended mostly lower since March. (It posted a slight increase in June). Purchase-mortgage activity, though steady, also suggested that no great uptick in sales would occur.
A drop in home sales is what we expected. A drop in sales is what we got.
New-home buyers appear to have extended their vacations in July. Sales were dropped to 571,000 units on an annualized rate for the month. The sales numbers failed to meet most economists’ expectations. That said, it’s worth noting that sales were revised higher by 33,000 units in the prior two months.
The drop-off in new-home sales appears less ominous in light of the revision and in light of the long-term trend. New-home sales are actually up 9.2% for the first seven months of 2017 compared with the same period last year.
As for the much larger existing-home market, sales were also down in July, which is nothing new. Existing-home sales fell 1.3% to 5.44 million units on an annualized rate. Existing homes are selling at the lowest rate they have all year.
Demand, as we all know, isn’t the intractable problem. Supply is. Low supply continues to hinder existing-home sales. It also hinders affordability. Low supply equals high prices. The median price of an existing home is up 6.2% year over year.
The existing-home market is where most first-time buyers enter. Given the relentless rise in existing home prices, fewer first-time buyers are able to gain entrance.
The mortgage-interest deduction also made news last week, thanks in part to a CNBC article that highlighted President Trump’s tax-reform proposal. The proposal includes reforming the mortgage-interest tax deduction.
CNBC really offered nothing new. Talk of capping the mortgage-interest deduction on loans no higher than $500,000 was discussed earlier this year. In the grand scheme of where most people stand financially, the lower cap is really a nonstarter.
Relative value is a bigger issue.
If President Trump’s tax reform passes in full, it would pass with a doubling of the standard deduction. The reform would still allow the mortgage-interest deduction, but with a higher standard deduction, the value of the mortgage-interest deduction is diminished. It’s also worth noting that Trump’s proposal would eliminate deductions for state and local taxes, including property taxes.
President Trump has had difficulty pushing his agendas through Congress this year. We suspect his latest tax reform push will face similar resistance. Therefore, we’re not particularly worried about the state of the mortgage-interest tax deduction in either relative or absolute terms.
The Dips Keep Coming
Financial-market participants frequently act like the one acquaintance we all know: the person who is happy only when he’s miserable.
Misery frequently accompanies worry, and market participants have been given a few new worries in recent weeks. Some market participants were unsettled by President Trump's reserved response to the Charlottesville violence that led to the disbanding of his CEO councils. North Korea nightmares linger in the crevices of other market participants’ minds. Other market participants fret over rumors that President Trump could shut down the federal government.
It all culminates into a flight to safety -- namely U.S. Treasury securities. The yield on the 10-year U.S. Treasury note has trended lower this month. It has taken mortgage rates with it. Quotes of 3.875% on a top-tier 30-year mortgage pop up more often these days. Rates continue to dip.
But as many sages have affirmed, this too shall pass. We refer to the worries and the dips they engender.
When we look to the horizon, we still see a Federal Reserve committed to raising interest rates. Fed officials want to continue to raise the fed funds rates -- something they have done three times since December. They’re also itching to reduce the Fed’s balance sheet, which would reduce the money supply and pressure interest rates to rise further still.
We’ve recommended locking on the dips in our recent missives. Our recommendation remains in force this missive. The dip offers yet another opportunity to lock in a favorable mortgage rate.