After yesterday’s improved 2 yr note auction compared with the poor one seen in June, the 5 yr auction was better as well. The yield was below the when issued, the bid to cover was above the one year average and direct and indirect bidders took 75% of the auction vs the previous 12 month average of 66%.
Bottom line, the market doesn’t believe the Fed is raising interest rates in September, that much is obvious. The odds by year end are exactly at 50% so go flip that coin. I hear from some that they’ll hike in December and not in September. Maybe so but if the data today in their eyes (as Fischer said the other day) warrants a hike now, why wait until December? They need to see more data, have more patience? One hike in 10 years is not long enough? Treasuries are little changed in response to the better auction.
Existing home sales in July, a somewhat dated number because contracts were likely signed in the April thru June timeframe, totaled 5.39mm annualized. That is a miss relative to expectations of 5.51mm and down from 5.57mm in June. It’s the lowest since March. Combining the m/o/m decline in sales and increase in homes for sale, months’ supply rose to 4.7 from 4.5 which matches the most since November. The median home price rose 5.3% which is similar to the Case/Shiller figures. After jumping three tenths in June to 33%, the percentage of first time buyers ticked down by a tenth to 32%. It still remains well below the 40% historical average with a multitude of reasons mentioned many times to explain it.
Bottom line, little inventory and rising prices are being blamed for the m/o/m drop in sales to the lowest level since March. The first time buyer in particular continues to get priced out of the market and is why they are choosing to rent and is why the homeownership rate is at the lowest level in 50 years. The NAR said “Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month. Realtors are reporting diminished buyer traffic because of the scarce number of affordable homes on the market, and the lack of supply is stifling the efforts of many prospective buyers attempting to purchase while mortgage rates hover at historical lows.” They said “sales in all regions are now flat or below a year ago and price growth isn’t slowing to a healthier and sustainable pace.”
While 5% house inflation can be easily absorbed into a long term mortgage with low rates, 5% house inflation is well above the rate of consumer inflation and is just not sustainable. We also need more new homes as even with the July lift in new home sales, they still remain almost 10% below its 25 year average which is not adjusted for population growth. I’ll continue with my belief that the housing market is recovering but it continues to unfold in a choppy and uneven way. Today’s mortgage application index to buy a home is at a 6 month low.
A day after the nice upside surprise in July new home sales, weekly mortgage applications to buy a home is telling a more modest story. It fell for the 5th week in the past 6 but the decline this week was small at just .3%. Either way, the index is at the lowest level since February. Some people certainly pay cash for their homes and the housing market continues to improve but this data still points to a recovery that remains choppy, albeit still upward. The index is still up 7.7% y/o/y. Applications to refi was lower by 3.2%, also down in the 5th week in the past 6 but they are still up about 45% y/o/y.
After being flat last week, US dollar 3 month LIBOR moved to a new multi year high as of Monday’s close. At .825% it’s at a level last seen in May 2009. A combination of money market flows and the new regime of LIBOR pricing continues to having a major impact. We all obsess over what Janet Yellen is going to say on Friday and do in September but 3 month LIBOR, a benchmark where Trillions of dollars of loans are priced off has already raised rates by another 25 bps since last December.