The Mortgage Corner

There aren’t enough new homes being built, apparently, as new U.S. homes sold at an annual rate of 444,000 in October, up 25.4 percent from 354,000 in September, the U.S. Census Bureau said Wednesday. And the inventory of new homes for sale plunged to a post-recession low of 4.9 months, which puts for-sale inventories back into 1960 levels.

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Graph: Econoday

Lower interest rates are also holding, as more Federal Reserve Governors are saying that QE3 tapering of securities’ purchases shouldn’t begin until the unemployment rate actually drops below 6.5 percent, from its current 7.1 percent. And economists don’t see that happening for at least another year.

The collection of sales data for both months was delayed by the federal shutdown, prompting the government to release the information on the same day. Demand in October was strong across the country, with double-digit percent gains in all four major regions. Part of what drove sales was a decline in prices and more demand for lower-prices homes, a trend that typically emerges in the colder months.

The median price of new homes fell 5.3 percent to $245,800 in October. That’s the lowest level since November 2012. The supply of new homes on the U.S. market, meanwhile, sank to 4.9 months in October at the current sales pace from 6.4 months in September. This is while new home sales are 21.6 percent higher compared to one year ago.

We mustn’t forget that the Federal Housing Finance Authority (FHFA) is also delaying any drop in conforming loan limits below $417,000 through 2014, which has to be heartening home buyers. As such a lower restriction on loan amounts would affect entry-level, lower-priced homes in particular.

Inventory levels are in fact back to levels last seen in 1997 to 2005 in this Calculated Risk graph that dates back to 1963. This is spurred the housing construction boom that boosted the housing bubble. But with all the restriction on mortgage lenders initiated by both the Federal Reserve and Dodd-Frank, Consumer Protection Finance Bureau, we don’t see the likelihood of another housing bubble. The homeownership rate has dropped to 64 percent from its high of 68 percent during the bubble. And with household incomes and debt loads that haven’t recovered from the Great Recession, there is little chance a bubble would re-occur anytime soon, if ever.

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Graph: Calculated Risk

In spite of this news, existing-home prices were building steam through September based on S&P Case Shiller, indicating overall demand is still strong. The 20-city index rose an adjusted 1.0 percent in September vs monthly gains of 0.9 percent and 0.6 percent in the prior two months. Very respectable gains swept all 20 cities for the second month in a row, led this time by Atlanta at plus 1.9 percent followed by a string of cities out West where S&P says there’s talk now of a housing bubble.

But we know S&P tends to be overly conservative in their projections. Most of the price gains were either in Las Vegas, or the California coastal cities of San Francisco, Los Angeles and San Diego, beneficiaries of the fast-growing Silicon Valley economy. So most of the growth in sale prices can be attributed to real economic growth, rather than the financial speculation that occurred on Wall Street leading to the Great Recession.

Harlan Green © 2013

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