Is the Housing Recovery in Trouble or Not?


With each new day, it seems as if there's yet another conflicting report about the housing market.

Yesterday, the Commerce Department said that new home sales mounted a robust recovery in August compared to July but still came in well below the seasonally adjusted annual rate seen in June. Fast forward to today, and the National Association of Realtors is saying that pending home sales fell for the third month in a row.

According to the latter's pending home sales index, a "forward-looking indicator based on contract signings," the number of home sales currently under contract fell by 1.6% in August compared to July. The one consolation is that they remain 5.8% above the same month last year.

If you follow the housing market, you'd be excused for wondering why statistics like these are moving in opposite directions. The answer lies in the recent behavior of mortgage rates.

"Sharply rising mortgage interest rates in the spring motivated buyers to make purchase decisions, culminating in a six-and-a-half-year peak for sales that were finalized last month," said Lawrence Yun, the industry group's chief economist. "Moving forward, we expect lower levels of existing-home sales, but tight inventory in many markets will continue to push up home prices in the months ahead."

Yun is referring to the NAR's report from earlier this week showing that existing home sales climbed in August to the highest since February of 2007. As he said at the time, "Rising mortgage interest rates pushed more buyers to close deals."

If true, it seems inevitable that the recent pickup in activity will taper off once this current wave of buyers makes its way through the system. And when that happens, the results are likely to reverberate throughout the economy.

In the financial space, some of the hardest-hit companies have been mortgage REITs, which are leveraged funds that hold massive portfolios of mortgage-backed securities. Because higher interest rates result in lower MBS values, companies like Annaly Capital Management and American Capital Agency are taking it on the chin.

Since the beginning of the year, these industry giants have experienced considerable erosion in their book values per share. Annaly's is down by 18% while American Capital's is off by 20%. Not coincidentally, both have been forced to cut their dividend payouts. Most recently, Annaly declared a $0.35 per share dividend for the third quarter, equating to a 13% decline from the second quarter.

Also feeling the heat are mortgage originators. As I've discussed recently, the executives at virtually every major bank commented about the downward trend in mortgage volumes at a recent industry conference.

According to the chief executive officer of SunTrust Banks , a regional lender operating in the Southeast:

Similar to what we're seeing across the industry, our July and August applications were down approximately 40% from the second quarter levels, principally driven by lower refinance volume. This reduction in applications, combined with some compressed margins, will lead to a notable decline in our near-term mortgage production income levels relative to the second quarter.

And here's the chief financial officer of JPMorgan Chase , the nation's largest bank by assets:

In the second quarter, we told you that if rates remained at [current] levels, we would expect volumes to be reduced by 30% to 40% in the second half of this year versus the first half on the back of dramatic reduction in [refinance] volume. ... This is indeed what's flowing out right now.

So, what does the future hold for the housing market? That's clearly anybody's guess.

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