Home Builder’s Sentiment Highest Since 2005

The National Association of Home Builders just released their Builder Confidence report:

In a further sign that the housing market continues to strengthen, builder confidence in the market for newly-built single-family homes rose two points in May to a level of 70 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the second highest HMI reading since the downturn.

“This report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas.

“The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market,” said NAHB Chief Economist Robert Dietz. “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”

Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Two of the three HMI components registered gains in May. The index charting sales expectations in the next six months jumped four points to 79 while the index gauging current sales conditions increased two points to 76. Meanwhile, the component measuring buyer traffic edged one point down to 51.

The three-month moving averages for HMI scores posted gains in three out of the four regions. The Northeast and South each registered three-point gains to 49 and 71, respectively, while the West rose one point to 78. The Midwest was unchanged at 68.

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 3.50 MBS) lost just -4 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.  The market saw its lowest rates on Monday and its highest rates on Thursday.

It was the 4th straight week where the end result was a very narrow change, but we did have some volatility during the week as there was a net difference of -67 BPS from our intra-day highs of the week and our intra-day lows of the week.

The two biggest movements were Wednesday and Friday.  Wednesday sold off (higher rates) due to comments from a Fed official and Friday rallied (better rates) due to weaker inflationary data.

The Talking Fed:
Boston Fed President Eric Rosengren said the Fed needs to hike at least 3 more times this year, note the 2 times that the market is expecting.  He said “Along with a gradual reduction in the level of the balance sheet, it would still be reasonable to have three rate increases over the remainder of this year.”  This was much more “hawkish” than what the markets have priced in which is basically only one more hike this year and not seeing an adjustment to the pace of MBS purchases until 2018.

Inflation?  The front-end (PPI) showed some inflationary pressure, but it is clear that for now that is being absorbed by companies and not being passed on to consumers as PPI showed a little weakness.  Of note is the fact that Core CPI YOY dropped back below the 2.00% target inflation rate which is why MBS rallied on Friday.

The April Producer Price Index (PPI) was much higher than expected. The Headline MOM reading was more than double market expectations (0.5% vs est of 0.2%) and is now at 2.5% on a YOY basis which is much higher than the consensus estimates of 2.2%.  When you look at the Core (ex food and energy) the MOM reading came in at 0.4% vs est of 0.2% and YOY it ws 1.9% vs est of 1.7%.  The YOY reading is the highest since January 2015!

The April Consumer Price Index (CPI) did not show the gains from Thursday’s PPI, which means that companies for the time being are not passing through the increased costs to consumers.  The Headline CPI MOM reading matched expectations (0.2% vs est of 0.2%) but the Core (Ex food and energy) MOM reading was a little light (0.1% vs est of 0.2%).  But the Fed looks at the YOY data and the Core CPI YOY fell back below 2.0% (1.9% vs est of 2.0%).

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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Taff Weinstein
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Cell: 832-794-2136

First Imperial Mortgage
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Houston, TX 77009
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