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Home Builder Confidence High Despite Rising Costs

By Taff Weinstein at

Home Builder Confidence High Despite Rising Costs

The June National Association of Home Builders/Wells Fargo Housing Market Index came in at a very strong reading of 66. The index stood at 66 last year in June 2017. A reading above 50 is considered positive sentiment.

All three the index's components were very solid. Current sales conditions hit 75, the component gauging sales expectations in the next six months was 76 and buyer traffic fell came in at 50.

Housing starts have been climbing slowly but not as much as the market needs. There is a severe shortage of existing homes for sale, and that is pushing home prices higher at a very fast pace, weakening affordability, especially at the entry level. Homebuilders, faced with higher costs for land, labor and materials, are focused mostly on move-up and luxury home construction, as margins are squeezed at the entry level.

"Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead," said NAHB chief economist Robert Dietz. "However, builders do need access to lumber and other construction materials at reasonable costs in order to provide homes at competitive price points, particularly for the entry-level market where inventory is most needed."

Source: NAHB.org

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 4.50 MBS) gained just +3 basis points (BPS) from last Friday's close which caused fixed mortgage rates to move sideways for the week.

Overview:  While a net change of just 3 basis points looks like a boring week, it was anything but.  We had a lot of volatility last week with a 50 BPS swing from our best pricing of the week to our worst pricing of the week.  The main focus of the markets was the Central Bank meetings and the Trade War.  Of the three main Central Banks that had policy statements (The Fed, European Central Bank and Bank of Japan) only our Fed had any real action.

Trade War: The U.S. announced $50B of tariffs on Chinese products. This is a 25% tariff rate on 1,102 product lines. The tariffs will be implemented in two tiers, the first one on July 6, and will cover $34B in imports, and a second wave, which will cover the remaining $16B, or 284 product lines, and will undergo further review in a public notice and comment process, including a hearing. 

China's response: They unveiled $50 billion in tariffs against U.S. goods including soybeans, light aircraft, orange juice, whiskey and beef, starting on July 6th which mirrored the U.S. tariffs schedule and tier system, China's Ministry of Finance is setting a two-tier system with $34B on July 6th and $16B more to follow.

The Talking Fed:  As widely expected, the Fed raised their Fed Fund Rate by a 1/4 point to a range of 1.75% to 2.00%.  However, there was much that went on.  
You can read the official FOMC statement here
You can read their Economic Projections here. 
Here are some Key Points from the Fed Action:
 - Raised Fed Fund rate by 1/4 point to a range of 1.75% to 2.00% 
 - Raised the Primary Credit Rate (not the same as the headline Fed Fund Rate) to 2.50%
 - Raised the Interest Rate on Reserve Balances by 20 BPS to 1.9%
 - The vote was 8-0
 - FOMC statement says economy growing at "solid rate,'' job gains have been "strong,'' consumer spending has picked up and investment continued to grow "strongly''.
 - The Fed removed the low inflation line: "Market-based measures of inflation compensation remain low".
 - Language about the economy upgraded, line about rates remaining below long-run levels "for some time'' was removed.
 - The median 'dot' for the end of 2018 has been 2.125% since Dec 2016 and this time around, it shifted higher to 2.375% confirming The Fed's expectation for two more rate hikes this year, while the 2019 dot rose from 2.9% to 3.1%, suggesting the hiking carries through.
 - 2018 is 2.375% vs 2.125% in March
 - 2019 is 3.125% vs 2.875% in March
 - 2020 and longer-run medians are unchanged at 3.375% and 2.875% respectively
 - Starting in January ALL FED MEETINGS WILL INCLUDE A LIVE PRESS CONFERENCE WITH POWELL.

Retail Sales: The May data showed the biggest surge in spending in 8 months. The Headline reading increased by 0.8% which was double the market expectations of 0.4%. Plus April was revised higher. When you strip out Autos, Retail Sales increased by 0.9% vs est of 0.5%. April was also revised higher. Across the board it looked very good with discretionary spending (restaurants,etc), building materials, department stores you name it. Just about every category saw strong growth with the exception of furniture.

What to Watch Out For This Week:


The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.

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