Monday Morning Cup of Coffee takes a look at news crossing HousingWire's weekend desk, with more coverage to come on bigger issues.
Housing affordability is hovering near post crisis lows, according to analysts at Bank of America Merrill Lynch in a note to clients.
“Even though mortgage rates declined modestly this week, we believe they are still 50-100 basis points too high, and are creating low affordability conditions in the housing market. In order for housing affordability to move up from post-crisis lows, and allow for a sustainable and meaningful increase in housing activity, we think 30-year mortgage rates need to drop from the current reading of 3.93% down to the 3.0%-3.5% range,” they write.
“If that does not happen, and rates move higher on a sustained basis, we see further declines in both mortgage production and associated housing activity from the already anemic levels of 2014. The higher rate scenario remains a riddle for us, as we fail to see how an acceptable growth scenario happens without housing's participation.”
The widely held consensus that Federal Housing Finance Agency Director Mel Watt will announce loosening of GSE credit standards, in a speech at this week's Mortgage Bankers Association annual conference and expo, does not materially change the analysts’ view on persistent weakness in mortgage production.
“At best, we see $30-$35 billion of incremental mortgage production in 2015, on top of our estimate of $850 billion total production, roughly a 4% increase. This is basically noise in the forecasting process. Changes in interest rates would have a far more material impact in our view,” they say.
“Overall, we see this week's extraordinary market action as consistent with our view that relatively attractive intermediate term return potential comes from remaining down in coupon and long duration in agency MBS and CMOs and down in credit in non-agency MBS, CMBS and CLOs.”
To the extent market volatility persists and creates cheaper market levels in these sectors, BofAML analysts think investors should take advantage and add to exposures.
“We do not believe the yield and spread compression trend of the past five+ years has ended. The weakness in mortgage production tells us housing is weak and requires lower rates and more policy accommodation, not less. As it has for years, this should continue to benefit the above securitized products sectors we are recommending,” the analysts tell clients.
On Tuesday we will see the existing home sales report for September. Existing home sales fell back 1.8% in August to a lower-than-expected annual rate of 5.05 million. Year-on-year, sales were down 5.3%, a bit more steep than minus 4.5% in the prior month.
Limited supply has been a major factor holding down sales with supply on the market falling 40,000 homes in the month to 2.31 million. Supply relative to sales, at 5.5 months, held unchanged reflecting August's sales dip. With recent weakness in pending home sales and home prices, this will be an important update on housing.
Existing home sales tally the number of previously constructed homes, condominiums and co-ops in which a sale closed during the month. Existing homes (also known as home re-sales) account for a larger share of the market than new homes and indicate housing market trends.
On Thursday we will get the FHFA purchase-only house price index for August. The FHFA purchase-only house price index decelerated with a rise of 0.1% in July, following a 0.3% advance the month before. The year-ago rate continued to slow, easing to 4.4% from 5.1% in June. These numbers compare to a recovery high in July 2013 of 8.5%.
And Friday we will get the new home sales report. New home sales, in a report that is frequently volatile due to a relatively small sample, surged 18.0% in August to a much higher-than-expected annual rate of 504,000. This was the biggest monthly increase since January 1992. Another positive in the report was a notable upward revision for July to 427,000 from the initial estimate of 412,000.
Low supply has been a stubborn problem holding down both sales of new homes and existing homes, and the surge in August sales has made this problem more pronounced. Supply of new homes at the current sales rate fell in August to 4.6 months from 5.6 months in the prior month. Builders will likely be scrambling to bring new homes onto the market which in August totaled 203,000 units versus 201,000 in July.
One bank, NBRS Financial in Rising Sun, Maryland, failed in the week ending Oct. 17, according to the FDIC.