Lawler: Early Read on Existing Home Sales in September; CAR Predicts Home Prices to Decline 8.8% in 2023!

And a discussion of Mortgage Rates and Treasury Yields

A few topics from housing economist Tom Lawler:

Early Read on Existing Home Sales in September

Based on publicly-available local realtor/MLS reports released across the country through today, I project that existing home sales as estimated by the National Association of Realtors ran at a seasonally adjusted annual rate of 4.82 million in September, up 0.4% from August’s preliminary pace and down 22.0%% from last September’s seasonally adjusted pace.  On an unadjusted basis the YOY % decline in sales was largest in the West, and smallest in the Midwest and Northeast.

Local realtor reports, as well as reports from national inventory trackers, suggest that the inventory of existing homes for sale last month was up substantially from a year earlier, and similar to that seen in August. However, the NAR’s estimate may not show the same increase as these reports suggest, as most of these reports exclude listings with pending contracts.  E.g., the Realtor.com report for September showed that listings excluding those with pending contracts were up 26.9% from last September, while listings including pending contracts were up just 0.7% YOY.  The NAR’s inventory estimate has tracked the Realtor.com total inventory measure much more closely than the “ex-pendings” inventory measure.  (Note also that the Realtor.com inventory number reflects average listings during the month, while the NAR inventory number is an end-of-month estimate.)  Just as the NAR inventory numbers understated the decline in “effective” homes for sale during much of last year, they are now significantly understating the increase in effective inventory.

Finally, local realtor/MLS reports suggest that the median existing single-family home sales price last month was up by about 8.0% from last September.

In terms of sales, note that mortgage rates, after reaching slightly over 6 % on June 21, fell back down fell back down to around 5 ¼% on August 1, but have since moved sharply higher to around 7%.  This latest sharp rise will almost certainly result in substantially lower home sales in the last few months of this year.

California Association of Realtors Predicts DECLINE in State Home Prices Next Year!

The California Association of Realtors released its housing forecast for 2023, in which it projected that the median existing single-family sales price in California next year would average $758,600, DOWN 8.8% from its estimated average in 2022 AND down 3.6% from the 2021 average. Here is their press release: C.A.R. releases its 2023 California Housing Market Forecast

The California median home price is forecast to retreat 8.8 percent to $758,600 in 2023, following a projected 5.7 percent increase to $831,460 in 2022 from $786,700 in 2021.

And Speaking of Mortgage Rates ...

In May of this year, I wrote a two-part series on why looking at mortgage rates relative to the 10-year Treasury was very simplistic, and that there were other factors this year that would logically and rationally result in mortgage rates rising relative to the 10-year Treasury rate.  These included (1) rising interest rate volatility; (2) a flatter yield curve; and (3) the end of the Federal Reserve’s buying of MBS.  Here’s a chart of the 30-year FRM vs. the 10-year Treasury rate so far this year.  I am using the Optimal Blue 30-year conforming FRM, which is available daily (on FRED), and which reflects actual rate locks on about 35% of all rate locks.

As the chart indicates, mortgage rates have risen sharply relative to 10 year Treasury rates this year.

On major reason is that interest rate volatility, both actual and that implied by options/swaptions prices, has soared. E.g., below is a chart of the “MOVE” index (available on, e.g., Yahoo Finance), which is an index of Treasury yield volatility implied by one-month over the counter options on Treasury securities.

As the chart shows, implied interest rate volatility has increased sharply this year.  Higher interest rate volatility increases the value of the borrower’s prepayment option, which lowers the value of the mortgage to the investor and increases the yield on the mortgage.

On the yield curve front, mortgages are typically valued “across the curve,” and all other things equal a flatter yield curve tends to result in a wider mortgage/10 year spread.  Here is a chart showing the spread between the 10-year Treasury and the 2-year Treasury.

Finally, this year has seen the so-called “option-adjusted” spread on agency MBS widen significantly from the negative values seen during most of last year when the Federal Reserve was purchasing massive (unwarranted) amounts of agency MBS, which they are no longer during.  While OAS differ widely across various firms because of differences in either prepayment models or interest rate models, below is a chart of the widely-followed Yield Book’s calculation of the OAS on current coupon agency MBS.

As these charts illustrate, there have been numerous market forces behind the substantial widening in mortgage rates relative to the 10-year Treasury rate.

CR: This note was from housing economist Tom Lawler.