Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall

This note contains four parts:


1. Existing Homes

2. MBA Purchase Applications Fall

3. Hovnanian Comments on Housing Market

4. Campell/IMF Survey Shows Rising Rates Pull Demand Forward

1. Existing Home Sales Rise 5.6%, Less Than Expected


Expectations were high going into today's Existing Home Sales print.  After Pending Home Sales rose 10% last month, consensus was for a roughly 7% increase in Existing Homes.  Existing Homes typically lag Pending by 1-2 months.  A recent Campbell/Inside Mortgage Finance survey suggests that the immediate impact of rising rates is to pull forward demand among first-time homebuyers.  We summarize this survey at the end of this note.  

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - existing

The median price of existing homes held steady MoM and eked out a slight gain YoY.  Median prices are not seasonally adjusted.  The November MoM increase of 0.1% compares to an average change for November of -0.1%.   August, September and January are historically the weakest months.

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - existing median price

On a year-over-year basis, existing home sales continue to decelerate.  The YoY comparison is lapping the expiration of the first homebuyers' tax credit in November 2009, and will look much better next month. 

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - existing YoY

Inventory declined sequentially to 3.71 million units from 3.86 million.  Months of supply fell to 9.5 months, a sequential improvement but still an elevated level.  

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - existing inventory

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - existing months supply

2. MBA Purchase Applications Fall as Refinance Applications Take Another Nose-Dive


MBA Purchase Applications fell 2.5% week-over-week on a seasonally adjusted basis, while Refinance Applications dove 24.6% in response to higher rates.  Seasonal adjustment factors tend to dominate the week-over-week fluctuations in Purchase Applications in the last few weeks of the year.

Rates remained higher for the week, but didn't rise further.  MBA mortgage rates rose 1 bp versus last week to 4.85%.  BankRate 30 year mortgage rates made a similar move, falling 3 bps versus a week ago to 4.97%. The sharp increase over the last several weeks has taken a clear toll on refinance activities, but purchase applications are much less affected thus far.  

Taking a step back as we head into year-end, mortgage application volume for 2010 is tracking approximately 24% lower than 2009 levels.

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - shark chart

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - mortgage rates

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - refi chart

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - shark chart long term

Are Rising Rates Pulling Housing Demand Forward? Existing Home Sales Rise, Purchase Apps Fall - shark YoY

3. Hovnanian Comments on 'Challenging' Environment


Hovnanian reported its 4Q results last night.  We will look for more detail in their call later this morning, but their commentary from the press release is illuminating.  

"In spite of strong long-term demographics, the current housing market remains quite challenging. The combination of a lackluster job market and high foreclosure activity is clearly having a dampening effect on the housing market. The only silver lining is that we continue to find land acquisition opportunities which we believe will yield appropriate returns at today's home prices and sales paces. Even without a general housing recovery, we are optimistic that as the percentage of deliveries from newly identified communities increases, our overall performance should continue to improve." 

4. Survey Shows Rising Rates Pull Demand Forward in the Short-term


A survey conducted by Campbell/Inside Mortgage Finance showed that the backup in mortgage rates pulled demand forward for some buyers.  Purchase share of first-time buyers rose to 37.2% in November from 34.4% in October, while fewer existing homeowners bought homes (42.9% in November versus 44.2% in October).  The remainder was investor activity, down to 19.9% in November versus 21.4% in October.  Thomas Popnick, the director of the survey, told HousingWire, "The recent surge in interest rates has made potential homebuyers nervous.  If rates go up much more, then a good percentage of them will no longer qualify for the properties they want. As a result, they're making bids on homes and quickly closing before their rate locks expire."  

This effect may explain the recent strength in Mortgage Purchase Applications and Pending Homes.  If so, the effect is likely to be temporary.  

Joshua Steiner, CFA

Allison Kaptur