I wrote yesterday about the head-spinning moves in interest rates this week. But the effect that's having on the mortgage market is worth a special mention.
The ten-year Treasury yield jumped from 2.15% to 2.47% by the close of trade on Friday. And we're starting to get a preview of what that will do to mortgage rates in the coming weeks if yields stay around here. The average 30-year fixed mortgage rate that our Diana Olick tracks jumped to 4.95% by late Friday.
"It's been the worst week for mortgages since 2013," during the Fed's "taper tantrum," Diana told us on Power Lunch. Worst as in biggest price decline, which pushes yields up. Sure enough, the rate was closer to 4.5% on Monday. It may take some time for this to all feed through into actual borrowing costs, but the vicious upward trend is notable--and historic.
Coming into this week, Freddie's average 30-year mortgage rate had already surged by nearly 0.6 points in the prior two weeks--its biggest such jump since 2009--to 4.42%, according to data provider Black Knight. Black Knight's data also shows 4.7% for the actual locked rates of consumers getting 30-year conforming mortgages as of Friday. In other words, in the past three weeks, mortgage rates have spiked from below 4% to almost 5%--increasing by nearly a full percentage-point.
Interestingly, the housing stocks anticipated this months ago. The homebuilders ETF, the XHB (which actually includes everything from Home Depot to Floor & Decor), peaked on December 10 at $86, and closed at $65 this week, a drop of 24%. Some of the homebuilders are trading at multiples as low now as what we saw during the housing crash of 2007-08. Like PulteGroup, trading at less than six times forward earnings estimates. Less than six!
Wall Street has been increasingly bearish on the stocks. Ken Zener of Keybanc lowered his price targets yet again on Lennar, Toll Brothers, and KB Home (all of which he rates "underweight") ten days ago, warning that Fed tightening cycles result in the building stocks falling on average 32% since 1969. "Low valuation is not a catalyst," he warns, and the builders typically don't bottom until rates peak--which is looking further and further away.
But what's bad for home builders, at least in the near term, isn't necessarily bad for home buyers. Just ask anyone who's been trying to buy a house lately--it's impossible. Just last week, friends of mine lost out on a house they were willing to pay "generously" for, because another bidder paid a price so high their own realtor was mortified.
Sales were going to slow one way or another, either because supply is so tight or because demand starts to ebb as affordability gets worse and worse. To put it bluntly, this is what the Fed wants right now--to take the steam out of the market by raising rates and tightening policy. And we're already seeing it show up in the data. New home sales have slowed for the past two months; homebuilder sales expectations for the next six months have dropped to a two-year low; and pending sales of existing homes are down for four straight months now.
Pantheon's Ian Shepherdson warns that sales could drop 25% this year, delivering a sizeable drag on GDP. Certainly, recent buyers are nervous that prices will slump and destroy the value of their investments. But I doubt this cycle will be a repeat of the housing bubble and crash we saw in the early 2000s. That was price-fueled, much like the recent meme stock mania; a quick way to make a buck. This is real demand, from millennials like my friends who are desperate to leave their apartments, to work-from-home relocaters.
And as Bill Smead--who remains steadfastly bullish on the housing sector--keeps saying, "owning a home is one of the only ways that average households can defend themselves from inflation." Indeed, data from the Census Bureau show that since 1940, home prices rose fastest in the inflationary decade of the 1970s (up 43%). Smead, the chief investment officer at Smead Capital Management, believes we are in for a repeat. Aside from certain of the builders, he's also bullish on other real estate plays, like REITS, and Home Depot.
It's a different story for the lending names, however. Mortgage originations are obviously slowing, and worse, refinancing volumes have cratered and are unlikely to return for the foreseeable future. As rates have jumped, Black Knight says just two million refinancing candidates remain in the U.S.--a 50% drop just this month, and down 80% from the start of January. Shares of Rocket, the mortgage lender, went public at $18 in mid-2020, peaked around $23 six months later, and closed around $10 on Friday.
Just imagine what will happen if mortgage rates, which are roughly based off of the ten-year Treasury yield, keep climbing. Add to that the possibility that mortgage spreads could widen as the Fed ends its purchases of mortgage-backed securities--and possibly even starts selling from its $2.6 trillion mortgage portfolio. Could the 30-year fixed mortgage rate be headed towards 6%, or even higher?
It's both the best of times and the worst of times for the housing market right now. It just depends on where your seat is at the table.
See you on Monday!
Kelly
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