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Housing and Rate update 5/31/2016

Tight Inventory Restricting Sales:

The usually strong spring housing market will be strong this year but could be far stronger, if only there were more homes for sale.

The number of listings continues to drop, as demand outstrips supply and potential sellers bow out, fearing they won’t be able to find something else to buy.

The inventory of homes for sale nationally in April was 3.6 percent lower than in April 2015, according to the National Association of Realtors.Despite ongoing inventory shortages and faster price growth, existing-home sales sustained their recent momentum and moved higher for the second consecutive month, according to the National Association of Realtors.

The supply numbers are even tighter in certain local markets: Inventory is down 32 percent in Portland, Oregon, from a year ago; down 22 percent in Kansas City; down 21 percent in Dallas and Seattle; down 17 percent in Charlotte, North Carolina; down 12 percent in Atlanta; down nearly 10 percent in Chicago; and down 8 percent in Los Angeles, according to Zillow. Houston and Miami are seeing big gains in supply, due to economic issues specific to those markets.

“The struggle will continue for home shoppers this summer,” said Zillow chief economist Svenja Gudell. “New construction has been sluggish over the past year; we’re building about half as many homes as we should be in a normal market. There still aren’t enough homes on the market to keep up with the high demand from every type of homebuyer.”

“In many markets, those looking to buy a home in the bottom or middle of the market will need to be prepared for bidding wars and homes selling for over the asking price. This summer’s selling season’s borders will most likely be blurred again, as many buyers are left without homes and will need to keep searching,” added Gudell.

The inventory drops are most severe in the lower-priced tier of the market. Homes in the top tier are seeing gains and therefore show more price cuts. Sixteen percent of top-tier homes had a price cut over the past year, compared with 11 percent of bottom-tier homes and 13 percent of middle-tier, according to Zillow.

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 3.00 MBS) lost -5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.

We were trapped in a very narrow technical range, squeezed in between our 50 day and 100 day moving averages.  We did have a lot of speeches by Federal Reserve members and they all certainly leave the door open for a rate hike in June/July but the bond market was effectively “on hold” until next week’s jobs data.

Housing: Pending Home Sales for April were much higher than expected with a nice jump of 5.1% when market only anticipated a 0.6% MOM gain.  YOY, it is up 4.6% which is a big increase over the last reading of 1.4%.

New Home Sales surprised to the upside by jumping 16.6% on a MOM basis, hitting 619K units vs forecasts of 523K.  The median price increased 7.8% to $321,100 which tells you that they are not building for the first time home buyer segment where we have huge inventory shortages.

Manufacturing: April Durable Goods were much higher than expected (3.4% vs est of 0.4%).  Now, we have seen huge swings in that headline numbers due to air craft orders, etc.  So, lets strip that out and look at Durable Goods ex-Transports and it increased by 0.4% vs est of 0.3%, plus March was revised from -0.2% to +0.1%.  Overall, a very robust report but there was an area of weakness as the Core Capital Goods dropped -0.8% and marks the third straight month of declines in that component of this index.

The Talking Fed:
St. Louis Fed President James Bullard stressed that the labor markets are relatively tight and may put upward pressure on inflation. (note: this is why we focus so much on Average Hourly Wages).

Philly Fed President Patrick Harker told the Philadelphia Bond Club that “There will likely be two or perhaps even three rate hikes over the course of the year,” which follows the big wave of Talking Feds pointing to a June/July Rate Hike.

Dallas Fed President Robert Kaplan was also on board with two rate hikes this year: “If economic data keeps going the way it is, I’ve said I will advocate for an increase in the near future,”  and  “That may not be June or July, My approach is take one meeting at a time.”  He also mentioned that a “Brexit” could be a factor at this June’s meeting.

S.F. Fed President John Williams said  that the Federal Reserve is on track to hike interest rates in June or July despite risks such as a “Brexit” vote, and will continue with even more hikes next year given U.S. economic strength.

Fed Reserve Chair Janet Yellen said that the economy has picked up from the slow pace of 4th and 1st QTRs and that she expects that both the labor market will continue to tighten and the economy to grow at the pace that it has been so far in 2nd QTR at the least. And if that is the case, then the Fed will be ready to act in the “coming months” however it is contingent on the data.

What to Watch Out For This Week:

Date Time (ET) Economic Release Actual Estimate Prior
31-May 8:30 AM Personal Income 0.40% 0.40%
31-May 8:30 AM Personal Spending 0.70% 0.00%
31-May 8:30 AM PCE Prices NA 0.10%
31-May 8:30 AM PCE Prices – Core 0.20% 0.10%
31-May 9:00 AM Case-Shiller 20-city Index 5.10% 5.40%
31-May 9:45 AM Chicago PMI 50.9 50.4
31-May 10:00 AM Consumer Confidence 96.2 94.2
1-Jun 7:00 AM MBA Mortgage Index NA NA
1-Jun 8:15 AM ADP Employment Change 180K 156K
1-Jun 10:00 AM Construction Spending NA 0.30%
1-Jun 10:00 AM ISM Index 50.4 50.8
1-Jun 10:00 AM Construction Spending 0.50% 0.30%
1-Jun 10:30 AM Crude Inventories NA -4.226M
1-Jun 2:00 PM Auto Sales NA 5.11M
1-Jun 2:00 PM Truck Sales NA 8.73M
1-Jun 2:00 PM Fed’s Beige Book NA NA
2-Jun 7:30 AM Challenger Job Cuts NA 5.80%
2-Jun 8:15 AM ADP Employment Change 180K 156K
2-Jun 8:30 AM Initial Claims 268K 268K
2-Jun 8:30 AM Continuing Claims NA 2163K
2-Jun 10:30 AM Natural Gas Inventories NA 71 bcf
2-Jun 11:00 AM Crude Inventories NA -4.226M
3-Jun 8:30 AM Nonfarm Payrolls 155K 160K
3-Jun 8:30 AM Nonfarm Private Payrolls 160K 171K
3-Jun 8:30 AM Unemployment Rate 4.90% 5.00%
3-Jun 8:30 AM Hourly Earnings 0.20% 0.30%
3-Jun 8:30 AM Average Workweek NA 34.5
3-Jun 8:30 AM Trade Balance -$41.6B -$40.4B
3-Jun 10:00 AM Factory Orders 1.60% 1.10%
3-Jun 10:00 AM ISM Services 55.4 55.7

The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.