Kristian Rouz — New applications for US mortgages posted their largest weekly decline in more than four months despite mortgage rates across most lenders falling due to a slight drop in bond yields. This comes as the Federal Reserve's base borrowing costs have increased, pushing longer-term interest rates and refi costs higher, whilst high home values have put a squeeze on buyer enthusiasm.
According to a report from the Mortgage Bankers Association (MBA), the index of home loan and refi requests declined 4.9 percent to 365.3 points in the third week of this month. Previously, the index posted such a steep decline in the first week of February, when it dropped 6.6 percent.
A separate report has found that more than half of US housing markets were overvalued as of April, suppressing effective consumer demand despite gains in disposable incomes due to the rising wages and lower federal taxes. Home values across the US rose an average of 6.9 percent year-on-year in April, and the trend has continued ever since.
This is according to a monthly home price report from CoreLogic.
"The best antidote for rising home prices is additional supply," Frank Nothaft of CoreLogic said. "New construction has failed to keep up with and meet new housing growth or replace existing inventory. More construction of for-sale and rental housing will alleviate housing cost pressures."
The highly-priced markets include the metropolitan areas of Denver, Colorado, Washington D.C., Houston, Texas, Miami, Florida, New York, Las Vegas, Nevada, and Los Angeles, California. Only 34 percent of regional markets were considered at their supply-demand value and just 14 percent were undervalued — typically, in areas with underperforming local economies.
Some economists have expected home sales to continue their rise despite the high prices, but the latest MBA data suggests there's not much room for growth left.
"Extremely low inventory conditions in most markets are preventing sales from breaking out, while also keeping price growth elevated," Sam Khater of Freddie Mac said. "Even if rates climb closer to 5 percent, sales have room to grow more, but only if current supply levels start increasing more meaningfully."
Housing starts rose 5 percent in May to a seasonally-adjusted 1.350 mln units, its highest since July 2007. The report found a construction boom happening in the Midwest, where new construction skyrocketed by 62.2 percent, whilst housing starts in the South and Northeast dropped.
The Commerce Department said that total new home construction across the US and both in the single-family and multi-family segments rose to just below its 11-year highest. However, the report also found a drop in the issuance of construction permits for the second consecutive month, as regulatory hurdles are still hampering the supply-side expansion in the housing market.
"There is some early evidence that lumber prices may now have peaked, but the shortage of labor will not be solved so quickly, and that means housing market conditions will remain tight for the remainder of the year," Matthew Pointon of Capital Economics in New York said.
Meanwhile, the MBA report also pointed to the recent bond market dynamics as suppressing effective mortgage costs, which might be supportive to some of the demand for mortgage products.
Last week, both domestic and international investors have been buying into US Treasury bonds amidst global trade concerns, suppressing the benchmark bond yield and weighing on commercial borrowing costs.
Nonetheless, the ongoing Fed tightening cycle suggests overall commercial interest rates, including those on home loans, will continue to climb until at least the year 2021. This suggests only an increase in housing supply and a moderation or reversal in home value growth could spur home buying activity over the coming period.
