Lawrence Yun’s Post

The 10-year Treasury borrowing rate is 3.9%. Under normal circumstances and based on a normal historical spread between the two interest rates, the average mortgage rate should be 5.6% to 5.9% today. The mortgage rate spread is instead still abnormally high (at 250 basis points) and therefore yielding 6.4% average mortgage rate. One reason for the large spread is due to the cloudy balance sheet among small and regional banks who have exposures to deteriorating office loans. To raise cash, some banks are selling off mortgage loans and mortgage-backed securities. The Federal Reserve’s own reduction in holdings of Fannie and Freddie backed mortgage backed securities is also at play.

Home sales did not recover in summer due to the wait-and-see approach towards the Fed rate cut, the election outcome, and more and better inventory options. In regards to mortgage rates, the market has already baked-in future rate cuts such that mortgage rates could actually rise a bit on the day of the rate cut on September 18th. https://lnkd.in/ejh6gN8y

The upper-end home sales market is moving relatively better than the mid-priced and lower-priced market. That’s partly due to more inventory choices on the upper-end. Another factor is just huge wealth gains from the stock market of the past few years. In early August there was a big one day stock market crash, which in hindsight looks to be one-off factor related to Japan raising interest rate at a time when the U.S. was hinting at upcoming rate cuts. That ruined something called carry-trade: borrowing cheaply from Japan and lending at higher interest rates in the U.S. Margin calls for those stretched-out led to massive one day sell. Since then the stock market has confidently bounced back to near all-time highs. But is it overpriced? The dividend yield is very low, which is suggesting investors should be dumping stocks. But many tech companies like NVIDIA, which produces computer chips to facilitate artificial intelligence, barely pay any dividends despite rising earnings. Therefore a better metric is Price-to-Earnings ratio, and it is suggesting that the stock price looks somewhat high but not super-high. The stock market at times has wild unpredictable personality. Let’s see what happens. The upper-end housing market depends partly on what happens in the stock market.

The American Dream now costs more than $150,000 a year for a family of four, but that figure differs widely depending on where you live. https://lnkd.in/dx3Ev8_k

How much incentives are homebuilders providing to home buyers and their buyer agents? They are definitely making more sales. Homebuilders inventories have been rising. The type of homes being built are tilted to smaller-sized and in more affordable regions of the country, as evidenced by flattening price of newly built homes.

With new rules regarding home buying process and a signed buyer agreement in place from last weekend (August 17th), there are many consumer questions. All the while, do not take eyes off a big development of falling mortagage rates.

I do not know all the particulars of the lawsuit from DOJ against a software company and rental property owners. What I do know, along with other economists, is that more supply makes rents more affordable. And any efforts at collusion falls immediately apart if there are many players, such as competing apartment owners and mom-and-pop investors. If there is a collusion to raise rent, then the blame perhaps could be on the government for any burdensome and costly development that hinders new supply.

The Fed signaled more clearly of the rate cuts ahead. Mortgage and bond markets already assumed as such. How many rates are baked-in into today’s mortgage rates are unclear. Still it is a positive development. https://lnkd.in/eg3EafN6

Home sales grew from cyclical lows. There are more inventory and the lock-in effects appear less strong. The raw sales were up 4% this July from a year ago, partly due to having two additional business days this July. After adjusting for business days and seasonality, sales are still down from a year ago. 1.3 million homes on the market is an improvement from 1.1 million a year ago. But to the extent that 2019 the pre-Covid year was normal with 1.9 million listings, we are still short. Over the long run, more supply is needed. More opening of federal lands for development and less regulation as Republicans are proposing or more tax credits to homebuilders as Democrats are proposing will add to supply. https://lnkd.in/et2QCMDt

Though home sales are down in the past two years, a further dissection reveals a big contrast. Existing home sales are running well below pre-covid figures. Meanwhile newly constructed home sales are moving along at or slightly better than pre-covid days. That’s due to increased inventory availability of newly built homes. One study (by FHFA) on the impact of lock-in effects of existing homeowners unwilling to list properties over the past two years have hurt existing home sales by 1.5 million per year. That is, without the lock-in effect, home sales would be about 1/3 higher than today’s figures. The lock-in effect should steadily go away over time as life changing circumstances lead to more listings: death, retirement, job changes, school changes, marriages, divorces, etc. The lock-in effect also becomes less strong when mortgage rates head lower.