The biggest issue with our housing market over the past two years is a huge shortage of available inventory with supply sitting well below 7 months at current sales paces. So, it is welcome news that construction rates of new home builds are projected to hit 1.4 million units on a yearly basis.
The LegalShield Housing Activity Index rose 3.9 points to 115.3 in July, driven by improvements in both the foreclosure and real estate components of the Law Index. The Housing Activity Index is up 1.8% for 2017 and is currently at its highest point since May 2006. Housing starts improved in June (as the Index has been signaling for several months) but remain below forecast levels, and year-over-year growth is essentially flat. The housing market continues to face significant headwinds, including higher prices for inputs (particularly lumber) and regional shortages of both skilled construction labor and land. However, the combination of existing home inventories near historic lows and nationwide housing prices now exceeding pre-recession levels should lead to increased housing activity. If the housing supply finally picks up to match current demand, construction investment should rise and housing starts may climb to an annual rate of 1.4 million or more by the end of the year.
“The LegalShield Housing Activity Index has a strong record of closely tracking U.S. housing starts over the last 15 years – and the Index continues to suggest that housing starts should be stronger than they currently are,” said James Rosseau, LegalShield’s chief commercial officer. “The Index is consistent with the fact that U.S. consumers are employed – as underscored by a strong June employment report – with solid credit, manageable debt levels, and heightened confidence about the economy. These factors, combined with historically low home inventories, point to a revival in housing activity.”
Mortgage backed securities (FNMA 3.50 MBS) gained +13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways lower from the prior week. The market saw its lowest rates on Thursday and its highest rates on Tuesday.
At a weekly change of +13 basis points, it was not enough of a move to cause mortgage rates to change. We had some downward pressure (bad for rates) due to WTI Oil making a run at $50 per barrel, strong optimism reports and very strong technical overhead resistance. But we had some very strong upward pressure (lower rates) due to saber rattling between the U.S. and North Korea, very tame domestic inflationary rates and a very solid 30 year Treasury bond auction. These two opposing forces slugged it out all week with the net impact of MBS (and therefore mortgage rates) moving sideways for the week.
Key Domestic Data from Last Week: Inflation: The July Producer Price Index showed a yearly gain of only 1.9% for the Headline number and 1.8% for the Core (ex food and energy). The market was expecting readings of 2.1% for both. So this was a miss to the downside.
Strike two. The CPI report did not crack the 2.0% mark. However, it was was basically inline with expectations. The Headline YOY Core CPI matched market expectations of 1.7% and the CPI YOY moved from 1.6% in June to 1.7% in July but missed the estimates of 1.8%. Bottom line, this report did not change any long bond traders’ view of future inflation.
Small Business Optimism: The July NFIB Index was stronger than expected (105.2 vs est of 103.0) and was an nice improvement over June’s reading of 103.6. Among the 10 components in the index, 7 of them saw gains, one was unchanged and 2 were lower. Job openings increased by 5 point and job creation plans rose by 4 points.
Jobs, Jobs, Jobs: The June Job Openings and Labor Turnover Survey (JOLTS) showed a large spike in demand for workers and in unfilled jobs. It came in at 6.163M vs est of 5.775M. This shows that in June, the economy was expanding and finding qualified workers was very difficult.
Economic Optimism: The IBD (Investor Business Daily) August survey was stronger than expected with a 52.2 reading vs a 50.6 estimate.
What to Watch Out For This Week:
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.
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