Housing Market Ripe For A Solid Spring

Housing Market - Applications Spike Higher

MBA applications report was fantastic in the week of March 22nd which was the first week of spring. On a weekly basis, the composite index increased 8.9% which was on top of a 1.6% increase. Purchase index was up 6% weekly after increasing 0.3%. Refinance index was up 12% after increasing 4%. 

Decline in interest rates finally started to have a big impact on demand. The 30 year fixed rate fell 3 basis points to 4.28% last week. That’s the lowest rate since February 1st, 2018. Record low was 3.31% in November 2012. On a yearly basis, purchase applications were up 4%. That’s a solid increase. However, it only matters if it continues for the next few weeks. One week of data isn’t enough to claim victory yet.  

Housing Market - Weak Housing Starts

February housing starts and permits fell because the West was weak because it had nearly a record amount of rain. This is after the wildfires hurt the market a few months ago. The region’s housing market can’t catch a break. Overall, starts fell from 1.273 million to 1.162 million which missed estimates for 1.201 million. 

January reading was revised up from 1.23 million. Permits fell from 1.317 million to 1.296 million which beat estimates for 1.3 million. The January reading was revised from 1.345 million. Therefore, this report went 1 for 4 as 1 reading was revised down and 2 missed estimates.

West had one of its wettest months in its history in February. It caused starts in the West to fall 9.4% yearly and permits to fall 22% yearly. This was a good report because the South, which is the largest market by far, had solid growth. Yearly starts and permits were up 7.8% and 10.7%. 

Overall, single family permits were unchanged from last month as the rate was 821,000. Single family starts fell 17% to an 805,000 rate. Multifamily starts were up big to a 357,000 rate and permits fell to 475,000. Overall, completions fell 1.1%.

Housing Market - Home Price Growth Falls Again

Home price growth has been falling for the past few months, but the shelter inflation segment of CPI hasn’t been dropping; it has been stable. The difference between shelter inflation and home prices is complex. So therefore shelter inflation might fall in the next few months. 

It doesn’t matter much now because inflation is below 2% anyway. It would be a bigger deal if above 2% inflation was causing the Fed to hike rates. More importantly, declining price growth makes houses more affordable.

As you can see in the chart below, Seattle’s non-seasonally adjusted home price index has fallen 5.9% from its recent peak. The top was 27% higher than the previous top. Prices fell 31% after the last bubble peak. Good news is there isn’t a housing bubble this cycle because lending standards remained high. Bad news is Seattle was one of the hottest markets this cycle, unlike last cycle. 

Year over year housing price growth peaked at 13.6% in May 2018. It was at 4.1% in January. That growth rate isn’t bad, but in rate of change terms it looks terrible. Prices could fall on a yearly basis soon if this trend doesn’t reverse. This time there won’t be a big default crisis. It’s healthy to see price growth fall because double digit growth is unsustainable.

Looking at the overall 20 city index, seasonally adjusted price growth was 0.1% in January which missed the consensus for 0.3% growth and the previous month’s growth rate of 0.2%. On a non-seasonally adjusted basis, 20 city prices fell 0.2% which missed estimates for no change and was the same as December’s reading. Non-seasonally adjusted yearly growth fell from 4.1% to 3.6% which missed estimates for 4.1%. That was the lowest growth rate since September 2012.

Housing Market - Great news for the housing market

It means demand should improve. If the labor market is strong this spring, buyers will have lower price growth, lower interest rates, and strong real wage growth. That’s a great recipe for improving demand. California saw weakness which is similar to the weakness in the starts & permits report except this is from a month prior to that. San Diego and San Francisco were the weakest cities as their yearly price growth of only 1.3% and 1.7% was much below Seattle’s.

Weakness in the tech sector is correlated with the weakness in California’s home price growth. The 3rd and 4th lowest price growth cities were Chicago and Los Angeles which had 2.3% and 2.9% yearly increases. Best 2 cities for yearly price growth were Las Vegas and Phoenix which had growth of 10.5% and 7.5%. Las Vegas is still the hottest housing market. However, even it has seen deceleration as price growth was 13.8% in August 2018.

Housing Market - Weak Tech Guidance

The chart below supports my narrative that the housing market is weakening in the West in tandem with the weakness in the tech sector. To be clear, the West was impacted by rain in February, but price growth in January was still weak. 

As you can see, as of March 22nd, 26 information technology firms gave negative Q1 guidance. Good news is 13 firms provided positive guidance. The biggest difference between negative and positive guidance was in healthcare as 16 firms gave negative guidance and 2 gave positive guidance.

Housing Market - Conclusion

Home price growth fell in January. Fast forward to February, we see strong permit and starts outside of the West which dealt with almost record rain. Fast forward to March, we see yearly purchase application growth of 4%. If that growth, which is helped by the decline in rates, continues, it will be a successful spring selling season. 

Mortgage rates will fall because the difference between contract and consumer mortgage rates is very high. Plus, rates have been falling in the past few weeks. 

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