U.S. home resales rose in May to a more than nine-year high as improving supply increased choice for buyers, suggesting the economy remains on solid footing.
But tight inventory levels and rising prices are still a major hurdle for buyers as the median house price soared 4.7 percent from a year ago to a record $239,700 last month and it would take 4.7 months to clear the stock of houses on the market, unchanged from April. A six-month supply is viewed as a healthy balance between supply and demand.
The National Association of Realtors said on Wednesday existing home sales increased 1.8 percent to an annual rate of 5.53 million units last month, the highest level since February 2007.
April’s sales pace was revised down to 5.43 million units from the previously reported 5.45 million units. Economists polled by Reuters had forecast sales rising 1.1 percent to a 5.54 million-unit pace in May.
Sales were up 4.5 percent from a year ago.
The strong home resales added to retail sales data in painting an upbeat picture of the economy. That should help allay fears about the economic outlook which were stoked by last month’s paltry job gains.
Existing home sales surged 4.1 percent in the Northeast and climbed 4.6 percent in the South. Sales in the West, which has seen a strong increase in house prices amid tight inventories, jumped 5.4 percent.
In the Midwest, sales tumbled 6.5 percent last month. The decline, however, followed recent hefty gains.
The number of unsold homes on the market in May rose 1.4 percent from April to 2.15 million units. Supply was, however, down 5.7 percent from a year ago.
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.00 MBS) gained +23 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve slightly from the prior week.
Even though MBS “popped” by +60 basis points on Friday, we still only closed up +23 BP for the week that is because MBS were under steady pressure for the entire week until Friday.
MBS closed at their highest levels (which equals lowest rates) since February 2, 2015. However, we have traded in this range several times over the past two months.
It was a very close vote and in the end the “leave” votes prevailed totaling 17,410,742 or 51.9% of the total votes.
Prime Minister David Cameron announced his resignation but will stay put for the next 3 months or so.
Officially, Great Brittan is still part of the EU. This was a populist referendum and not a policy vote. It is expected that the next Prime Minister and Parliament will at some time in the near term invoke “Article 50” which is the exit clause in their membership with the EU. At that point then Great Brittan will have 2 years to gradually ease out of the EU and negotiate new trade agreements with each individual country.
Primarily, voters were most concerned about the UK’s sovereignty and were frustrated with being forced to follow rulings imposed upon them by unelected officials that were operating the EU as a socialist operation and dictating immigration (refugee) laws among other liberal policies that were clearly not the desire of the conservative British nation.
The voters did not fall for and even disliked the “doom and gloom” projections from President Obama, and the heads of the IMF, ECB, BofE as well as just about every major financial institution in London.
What we don’t know:
We certainly don’t know the timing of their actual exit from the EU but the ripple effects are definitely on the radar of bond traders.
Federal Reserve – just about every “Talking Fed” had come out saying that our own economic conditions were supportive of a rate hike or two this year but held off at the last meeting citing concern over a possible Brexit vote. Does this now mean that there will be no rate hikes this year? Does there need to be a rate cut? This is a big issue and wont be known for some time. Clearly our economy has been, is and will be operating at a level that does not warrant “emergency low rates” which is what we have right now. Our economy can certainly support (and even needs) a rate hike in order to progress but we might not see one until December if at all.
Scotland – overwhelmingly, the country voted to stay in the EU. There is already talk of another referendum vote to separate from Great Brittan so that they can remain in the EU. This wont be a major market event though. It was a big concern the last time that they had a referendum vote but that was because the market was concerned about the impact on Great Brittan’s economy and that certainly isn’t an issue now.
The Fate of the EU: Does this spell the end of the EU? Maybe…it certainly spells the end of the EU in its current state. Every single member nation has an opposition party that has wanted to exit the Eurozone but has not had the traction to do it. Bond traders are concerned that now those opposition efforts will increase. Since the UK was not part of the currency its not as large of a factor but if other member nations that are a part of the currency (Germany, Spain, Italy, etc) leave then its game over for the EU.
Durable Goods: We have seen some wild swings in this data set and the May data was no exception coming in at -2.2% vs market expectations of -0.5%. When you strip out the volatile transportation sector it fell -0.3% vs market expectations of a flat reading. The culprit? Well much has to do with capital goods but this data set simply isn’t jiving with the strong ISM and labor, production,etc data readings that we have been seeing. Either this report is wrong or all the others are..too early to tell.
Consumer Sentiment: The revised June reading (from 94.0 down to 93.5) is actually pretty strong. The current conditions index increased to 110.8 which is a positive for future spending. Of course, sentiment may change after the Brexit it will be interesting to see how American’s perceive that event as a headwind if anything at all.
Exiting Home Sales: The May reading increased by 1.8% for 5.53M units, which was basically in line with forecasts calling for 5.54M units. The median price moved up to $239,700 which is a 4.7% increase from May last year. Inventory levels were only at 4.7 months.
The Talking Fed:
Fed Chair Janet Yellen testified before the Senate Banking Committee and the House Financial Services Committee.
Overall, she seemed to softened up a little bit more from her last press conference. There was nothing really new or shocking in her responses that would change any bond trader’s mind on the timing and trajectory of future rate hikes. She was asked in several different ways about the impact of a “Brexit” and she responded “If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy,” she said.
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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