The Housing Market Update

Inventory Shortage Hampers Pending Home Sales:
The National Association of Realtors released their Pending Home Sales report and there is a glaringly obvious issue: Lack of inventory available for purchase.
The Pending Home Sales Index a forward-looking indicator based on contract signings, retreated 2.6 percent to 106.3 in August from 109.1 in July. The index is now at its lowest reading since January 2016 (106.1), is 2.6 percent below a year ago, and has fallen on an annual basis in four of the past five months.
Lawrence Yun, NAR chief economist, says this summer’s terribly low supply levels have officially drained all of the housing market’s momentum over the past year. “August was another month of declining contract activity because of the one-two punch of limited listings and home prices rising far above incomes,” he said. “Demand continues to overwhelm supply in most of the country, and as a result, many would-be buyers from earlier in the year are still in the market for a home, while others have perhaps decided to temporarily postpone their search.”
With little relief expected from the housing shortages that continue to plague several areas, Yun believes the housing market has essentially stalled. Further complicating any sales improvement in the months ahead is the fact that Hurricane Harvey’s damage to the Houston region contributed to the South’s decline in contract signings in August, and will likely continue to do so in the months ahead. Furthermore, the temporary pause in activity in Florida this month in the wake of Hurricane Irma will slow overall sales even more in the South.
Yun now forecasts existing-home sales to close out the year at around 5.44 million, which comes in slightly below (0.2 percent) the pace set in 2016 (5.45 million). The national median existing-home price this year is expected to increase around 6 percent. In 2016, existing sales increased 3.8 percent and prices rose 5.1 percent.
“The supply and affordability headwinds would have likely held sales growth just a tad above last year, but coupled with the temporary effects from Hurricanes Harvey and Irma, sales in 2017 now appear will fall slightly below last year,” said Yun. “The good news is that nearly all of the missed closings for the remainder of the year will likely show up in 2018, with existing sales forecast to rise 6.9 percent.”
The PHSI in the Northeast fell 4.4 percent to 93.4 in August, and is now 4.1 percent below a year ago. In the Midwest the index decreased 1.5 percent to 101.8 in August, and is now 3.2 percent lower than August 2016.
Pending home sales in the South retreated 3.5 percent to an index of 118.8 in August and are now 1.7 percent below last August. The index in the West declined 1.0 percent in August to 101.3, and is 2.4 percent below a year ago.

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 3.50 MBS) lost -21 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week. We saw some “choppiness” on Wednesday. The markets saw their lowest rates on Monday and their highest rates on Thursday.

Overview: Last week was packed full of market moving news and most of it was positive for our economy which is always negative for longer term rates. We also had the grand unveiling of the Tax Reform and saw market sentiment move away from expecting Janet Yellen to remain as the Fed Chair in 2018.

GDP: We got the final reading for the 2nd QTR GDP and it was revised upward to 3.1% vs est of 3.0%. Consumer Spending remained a very strong component at a 3.3% clip. This confirms that our economy had a good amount of momentum rolling into the 3rd QTR and that the 3rd QTR would likely be very strong except that the Hurricanes will drag on the data.

Durable Goods: This data was much better than expected. The headline August reading came in at 1.7% vs est of only 0.7%. When you strip out the volatile transportation sector, it increased by 0.2% which matched market expectations. The prior month (July) was revised upward from 0.5% to 0.8%. The Core Durable Goods Orders (non defense and non aircraft) came in three times higher that expectations (0.9% vs est of 0.3%).

Manufacturing: The bell-weather Chicago PMI was very robust, coming in at at three year high of 65.2 vs est of 58.5. Any reading above 50.0 is expansionary and readings above 60.0 are very rare.
Tax Reform: We will finally got the official release of Trump’s proposed Tax Reform. Here are some of the key highlights:
– elimination of the AMT
– elimination of the “Death Tax”
– Four “tax” brackets – 0%, 12% 25% and 35%
– Married couples up to 24K pay no taxes (0% tax bracket)
– Most itemized deductions eliminated
– Corporate tax rate 20%
– Company tax rate reported as personal income 25%
– Tax free repatriation on foreign profits

The Talking Fed:
Fed Chair Janet Yellen said that “Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession.”

Game of Thrones: The waiting game to who the next Fed chair will be got a little excitement after news broke that both President Trump and the Treasury Secretary met with former Fed Board Governor Kevin Warsh yesterday. No news from that meeting has emerged other than it happened. As a result, Wall Street has changed their odds of Warsh getting the nod from 10% to 45%. Meanwhile Yellen’s odds dropped from 32% down to 24%. Still a tight race as there are few more names on the “short list”.
What to Watch Out For This Week: