The housing market has been one of the few sectors that has shown consistent strength from the very beginnings of the recovery after the induced lockdowns of April and May last year. There was, however, some plateauing in sales activity recently, as existing home sales had four straight months of declining sales on a month-over-month basis, but most of that slowing was due to lack of inventory. While limited inventory remains a problem, sales did tick up in June which reflects the robust underlying demand. Also, with mortgage rates following Treasury rates lower— the latest 30-year rate is 2.78%, a level last touched in February—sales activity is very likely to continue strong through the balance of summer and beyond. Those lower mortgage rates also could spell increasing prepayments for existing mortgage investors, so keep an eye on whether this latest push lower in yields sticks.


Housing Sales Rebound as Mortgage Rates Fall

Sales of previously owned homes rose for the first time in five months in June as demand remains strong when inventory is available. Existing sales, which are based on closings, increased 1.4% from the prior month to an annualized 5.86 million rate. The June pace was in line with the 5.9 million median Bloomberg forecast. The improvement in sales suggests demand remains robust despite increasing prices and limited inventory that have curbed sales in recent months as shown in the graph below. Sales were just above the 5.80 million average over the past four years. The number of homes for sale picked up slightly in June but the lack of supply remains an ongoing constraint to sales.

 

 

As a result of strong demand and limited inventory prices are rising at a pace last seen in the housing crisis more than a dozen years ago. The median selling price was up 23.4% from a year earlier to a record $363,300 last month, but part of that gain reflects increased sales of higher-end  properties, but make no mistake housing prices are galloping ahead  in most areas. Housing analysts expect the pace of price gains to slow as the pool of available buyers shrink some given the increasing costs. There were 1.25 million existing homes for sale last month, the highest since November, yet down 18.8% from a year earlier. At the current pace, it would take 2.6 months to sell all the homes on the market. Realtors typically see anything below five months of supply as a sign of a tight market. An example of the red-hot nature of the market, properties remained on the market for just 17 days on average in June, matching the fewest on record. Nearly 90% of the homes sold were on the market for less than a month.


Mortgage Rates Fall to Lowest Since February

We mentioned in the above section that existing home sales were stronger month-over-month for the first time in five months but much of that recent plateauing in sales was due to limited inventory as demand continues to remain strong. One factor that will continue to stoke robust demand is the fact mortgage rates have followed Treasury yields lower and are now at levels last seen in February. That will undoubtedly keep demand strong for housing but also add more prepayment risk to the mortgage investors.

 

 

The latest conventional 30-year mortgage rate is 2.78% which means any existing loan at 3.25% or more is susceptible to refinance. Trying to determine those pools that might be most susceptible you have to consider a few items. First, new mortgages tend to see speeds ramp up quickly beginning at around the six month mark until around their third year. After hitting their prepayment peak, mortgages tend to slow down as a function of “burnout,” which means that many of the remaining home owners that have not yet refinanced either will not or cannot do so. Therefore, pools with coupons around 2.5% (implying underlying mortgage rates at 3.25%, or higher) and ages between 6 and 24 months could see accelerating prepayments in the months ahead given the recent decline in rates. Investors in these pools may want to keep an eye on retail mortgage rates over the next couple months for if the current rate holds, or continues lower, accelerating prepays may be in store in the fourth quarter as some homeowners with mid to low 3% mortgage rates look to refinance.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.09 0.32 0.57 0.88 1.70 2.16
0.50 0.08 0.29 0.51 0.77 1.56 2.05
1.00 0.07 0.26 0.48 0.73 1.47 1.92
2.00 0.24 0.42 0.65 1.35 NA
3.00 0.60 1.29 NA
4.00 1.24 NA
5.00 1.21 NA
10.00 NA

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Published: 07/22/21 Author: Thomas R. Fitzgerald