CHM Blog

With homebuilding standstills becoming prevalent, higher rents are bound to follow

All housing starts with something being built and proceeds from that premise. So when we see a decrease in new-home construction, it affects the overall housing market, including the rental market.

“Housing starts in July dropped 7%, and single-family home construction within that fell 4.5%, the Commerce Department reported Wednesday,” says Realtor Magazine. They cite the chief economist of the National Association of REALTORS®, who says, “Rents will be soaring in the coming months, especially for apartment units, as homebuilding retreated in July. There was a housing shortage before the pandemic, and the shortage has been exacerbated during the pandemic.” He adds that homebuilding needs to “greatly” increase as the job recovery takes hold.

Blaming a combination of supply-chain disruptions, rising material costs, lags in land lot development approvals, and labor shortages, builders are being stifled when trying to build homes. Buyer demand for new homes is strong, they say, but the challenges and cost rises have become too great to meet it. To catch up with the rapid number of sales they’ve made over recent months, many home builders have stopped taking new orders—an unprecedented move.

“Through our history, to have somebody walk into our models and [to have to] tell them, ‘We don’t have a house for you to buy today,’ is something that is foreign to us,” David Auld, CEO of D.R. Horton Inc., said on an earnings call in July.

All housing starts with something being built and proceeds from that premise. So when we see a decrease in new-home construction, it affects the overall housing market, including the rental market.

“Rents will be soaring in the coming months, especially for apartment units, as homebuilding retreated in July,” Yun says. “There was a housing shortage before the pandemic, and the shortage has been exacerbated during the pandemic.”

In the meantime, home prices for both new and existing are surging. The median price of a newly built single-family home was $361,800 in June; the median existing-home price of a sold home in June was $363,300. “With home prices having risen by record amounts over the past year, home buying will become an increasing challenge, and a good number of households may simply decide to rent,” Yun says. “In addition, the jobs recovery is enticing people out of their parents’ homes to seek their own housing.”

“With an inadequate supply of available homes, rents will be strengthening and adding further pressure to overall consumer price inflation,” he adds.

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 moving sideways today. The MBS market worsened by -18 bps last week. This may not be enough to increase mortgage rates or fees. The market experienced moderate volatility last week.

This Week's Rate Forecast: Neutral

1) The Fed: This week begins the Kansas City Fed's Jackson Hole WY Economic Symposium. Which due to Covid in Teton County spiking has now been moved to a Virtual event, just like last year. We will hear from all the major Fed players including a speech by Fed Chair Powell on Friday at 10 am ET. The bond market will be looking for any further momentum (or lack thereof) regarding the Fed's asset purchase program of $120B in Treasuries and MBS.

2) Inflation: We get the Fed's preferred key measure of inflation (YOY Core PCE) on Friday, and it's expected to be well above 3%.

3) Covid and Geopolitical: Covid continues to be a significant driving force in the economy as the Fed and ever major investor has downgraded the economic recovery and this will be a big factor in this week's Jackson Hole meeting. The U.S. House is back from their break and will once again take up the $3.5T non-infrastructure package.

This Week's Potential Volatility: Low

This morning we're not expecting much movement and while there is room for improvement it's risky. Volatility should stay low to moderate ahead of the Fed Symposium on Thursday.

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 27 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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