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HOMING SIGNALS: NEW HOME SALES, MORTGAGE DEMAND, THE ROAD TO HOUSING ACT

A double-dose of housing market data on Wednesday, along with some new legislation due to be signed into law today (awkwardly called the Renewing Opportunity in the American Dream to Housing Act), are painting a picture of a sector long overdue for renovation.

The sales of freshly constructed single-family U.S. homes USHNS=ECI unexpectedly dropped by 7.3% in May to 580,000 units at a seasonally adjusted annualized rate (SAAR), according to the Commerce Department.

That's the lowest level since July 2022, and lands 9.2% south of the 639,000 units SAAR analysts predicted.

The number extends April's 5.7% drop and stands in contrast to the 3.5% increase in sales of pre-owned single-family homes in May, as reported by the National Association of Realtors earlier this month.

Regionally, a 16.2% rise in new home sales in the Midwest and a more tepid 3.0% growth in the Northeast were handily offset by a 26.9% plunge in the West and a 4.1% decrease in the South.

"The combination of slower population growth, high mortgage rates and low consumer confidence is continuing to throttle residential construction," says Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.

At May's sales rate, it would take 10.3 months to sell every new single-family home on the market, up from 9.3 months in April.

The average home price jumped 7.8% in one month. Couple that with elevated borrowing costs—the average 30-year fixed rate has been soaring north of 6% since September 2022—and inflation fears arising from geopolitical uncertainty, it's not difficult to figure out why buyers are hesitant.

U.S. President Donald Trump is expected to sign a housing bill into law today, which will boost manufactured and modular housing and limit institutional ownership of single-family rental homes. The new new is widely seen as a step in the right direction.

"This bill will not solve the housing affordability crisis but shows Congress is focused on the problem which is why we expect a bigger bill next year," writes Jaret Seibert at TD Cowen.

The cost of financing home loans inched a wee bit lower last week, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate USMG=ECI inched one teensy basis point lower to 6.59%.

While that was enough to prompt a 3.0% increase in refi applications USMGR=ECI, would be home buyers were less impressed. Demand for loans to purchase homes USMGPI=ECI slipped by 0.6%.

Combined, home loan demand rose by a tidy 1.0% last week.

“Mortgage rates changed little over the course of last week, despite the more hawkish tone from the FOMC at its June meeting,” writes Mike Fratantoni, MBA’s chief economist. “Despite the elevated mortgage rates and overall economic uncertainty, mortgage application volume is running 8 percent above year-ago levels.”

The 30-year fixed rate currently sits 29 basis points below where it was during the same week a year ago.

Over that same period, purchase applications have grown by 2.7%, while refi demand has increased 16.9%.

MBA's mortgage demand, while relatively current, is still last week's data.

Housing stocks, on the other hand, reflect where investors expect the sector to be six months to a year in the future.

With that in mind, investors' view of the sector is improving.

While housing-related indexes - the S&P 1500 Homebuilding Index .SPCOMHOME and the PHLX Housing Sector Index .HGX - easily outperformed the broader market in the first two months of the year, that advantage evaporated in March when the U.S.-Israeli war on Iran pushed interest rates higher, taking mortgage rates with them.

The indexes moved in tandem with the S&P 500 through much of March and April, and while they fell behind in May they have since benefited from bargain shopping.

Year-to-date, the SPCOMHOME and the HGX are up 2.3% and 8.4%, respectively, closing the gap on the S&P 500's .SPX 7.6% advance over the same timeframe.

(Stephen Culp)

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