CHM Blog

Housing market hibernation frustration

When Bill Murray’s character in “Groundhog Day” tried over and over again to change the outcome of his nightmare scenario to become a better person, it took time and a concerted effort to change more than just one aspect of his approach. He had to get out of his own way. Such is the case of today’s housing market.

The industry finds itself trapped in a frustrating paradox where builders want to build and buyers want to buy, yet both groups remain paralyzed. Because of economic uncertainty and rising costs, April marked the slowest month for existing home sales in sixteen years, according to NPR’s Laurel Wamsley.

At its heart lies affordability. And the pandemic was the ideal time and place for this trend to grab hold. “Home prices have surged nearly 50% since before the pandemic, with the median existing home price reaching an all-time April high of $414,000,” says Wamlsey. “This represents the 22nd consecutive month of year-over-year price increases.”

Next up in the blame game? Mortgage rates have climbed in a dramatic increase from their pandemic low, when everyone jumped on the refinancing bandwagon. These twin pressures have pushed homeownership out of reach for countless Americans who dream of buying their first home or upgrading to something larger.

The demand is there, but it’s obscured, despite millions of new jobs being added to the economy. Home sales remain stuck at just 75% of pre-pandemic activity levels. NAR’s Lawrence Yun notes that pent-up housing demand continues to grow without being fulfilled. “Any meaningful decline in mortgage rates would help release this suppressed demand.”

Wamsley goes on to explain how construction challenges compound the problem. Building permits, new home starts (including multi-family), and completions all declined compared to the previous year, signalling fewer homes entering the market in the future.

Trade policy is also flummoxing the equation, with the ongoing tariff debate resulting in significant uncertainty for builders — particularly regarding Canadian lumber imports. “Wood-framed homes represent about 90% of single-family construction, and roughly a quarter of the softwood lumber used in American construction comes from Canada,” writes Wamsley. “Currently, there's a 14.5% duty on Canadian lumber, increased from 8.05% last August, with the possibility of further increases pending Department of Commerce review. Framing lumber costs have risen about 16% over the past year.”

National Association of Home Builders’ Robert Dietz calculates that all tariffs enacted or expected so far add nearly $11,000 to the cost of building a single-family home. And a whopping 78% of builders in a recent survey reported they cannot accurately predict construction costs or selling prices, further muddying the waters. Wamsley reports that this uncertainty forces builders to slow production when they cannot raise prices to match rising costs.

But wait. There’s more. The situation is further complicated by increased competition from existing homes. While the inventory of resale homes has increased more than 20% over last year, it only compounds the issues builders now face, often forcing them to reduce prices. In May, 34% of builders cut prices, up from 29% in April. In other words, nobody is winning except for a few lucky homeowners who walk away from their abodes with a ton of cash in their pockets (as long as they have a place to go.)

Many Americans who hoped to purchase homes this spring have been deterred by concerns about possible job losses, high mortgage rates, and stock market volatility. Many are finding reasons to postpone their home purchases, checking listings less frequently and focusing on building their financial reserves while waiting for more favorable market conditions.

This widespread hesitation creates a feedback loop that perpetuates the market's stagnation, leaving the housing sector in an uncomfortable holding pattern where demand remains strong but little more than a pipe dream. And that groundhog? His shadow really has little impact when so few barns are being raised.

NPR,TBWS

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I'm among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Neutral

Mortgage rates are under pressure today. The MBS market improved by +54 bps last week. This was enough to decrease mortgage rates or fees. The market experienced high volatility last week.

This Week's Rate Forecast: Neutral

Three Things: These are the three areas that could have the greatest impact on rates this week. 1) Geopolitical, 2) Jobs and 3) Central Banks.

1) Geopolitical: Deficits and Tariffs will continue to drive long bond yields. This morning, we have steel imports tariffs set to go from 25% to 50%, China and U.S. negotiations appear to be fizzling and despite "peace" talks between Ukraine and Russia this week, we saw a big offensive by Ukraine over the weekend.

2) Jobs: We have a ton of labor, job and wage related data all week-long culminating in Big Jobs Friday. The bond market will be looking to see if government cuts (which also impacts the private sector as there are multiple private sector jobs that get impacted for each cut in a government program) will show up in the NFP data.

3) Central Banks: We will hear from the Bank of Canada which is expected to stand pat and the European Central Bank which is expected to cut. Our own Federal Reserve will release their Beige Book on Wednesday.

This Week's Potential Volatility: High

This morning markets are seeing some rocky trading at the top of our channel. Volatility has started at moderate levels and will likely become higher later this week.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

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