Current Report – October 2017
- The Housing Tides Index fell by nearly three points this month, and at a value of 70.1 the Index is at its lowest point since June 2016.
- Driving the significant drop in the Index was the release of 2016 local household formation data, as the Index component that measures the ratio of housing permits to household formations worsened considerably from a largely healthy ratio of 1.24 in 2015 to a less-ideal 1.83 in 2016.
- It’s difficult to reconcile the above with the extreme shortage of homes for sale, which fell to 2.8 months of supply in August. It’s possible that investors and second-home buyers continue to snap up homes. The National Association of Realtors reported that just 70% of home sales in 2016 were to buyers who intended to use the property as a primary residence, which is consistent with this hypothesis.
- Federal Housing Finance Agency data show that the effective mortgage interest rate for sales closed rose to 4.14% in August, up from a 2017 low of 4.02% in May. The Federal Reserve announced a widely-anticipated plan to slowly reduce its balance sheet starting in October, as the central bank sees market conditions appropriate to slow reinvestment of the maturing mortgage-backed securities (MBS) and U.S. Treasury bonds that constitute the majority of holdings accumulated during periods of quantitative easing.
- Some analysts speculate that this will have similar effects as a hike of the federal funds rate, as decreasing overall demand for MBS and Treasuries should decrease their prices and subsequently increase their yields, all else equal. Consequently, mortgage rates would increase as investors could obtain higher yields elsewhere, increasing the mortgage risk premium.
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