Homeownership Remains a Top Priority among Consumers

The Housing Market Update

Homeownership Remains a Top Priority among Consumers:
The dream of owning a home is still viewed as the number one as a long-term financial goal for Americans, with 54% saying it was their primary long-term financial objective – an 11% increase from last year.  That is according to a recent survey conducted by Report Linker. In fact, 81% say home ownership is the best long-term investment a person can make.

The investment advantage is one of the forces driving Millennials’ interest in buy In the first quarter of this year, the number of new-owner households was double that of new-renter households, an indication the younger generation is moving into the buyers’ market.

A major challenge for would-be homeowners is the lack of housing inventory. The US is in the midst of a housing shortage, largely because members of the Millennial generation want to live closer to urban areas – and the numerous restaurants, attractions and short commute times they offer. In response, builders have focused on urban housing rather than the less expensive suburbs, leading to a decline in overall housing starts and a focus on higher-priced city homes. But as Millennials marry and look to leave their rentals behind, starter homes are beginning to make a comeback and builders are now shifting their focus from luxury homes to lower price points that first-time buyers can afford. They’re also expanding beyond urban areas into the exurbs where land is cheaper.

Among homeowners, 31% have a mortgage, while 15% own their home outright. Those most likely to be mortgage free are those 55 and over (36%), while half of those aged 35 to 44 are more likely to still be chipping away at their payments. More than a quarter of respondents to ReportLinker’s survey say they rent from a private landlord. Renting is especially common among older Millennials aged 25 to 34 (44%), while four in 10 young Millennials (age 18-23) say they stay with friends or family for free.

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 3.50 MBS) lost -57 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.  The market saw the lowest rates of the week on Monday and the highest rates of the week on Thursday.

Overview:  A very interesting and very telling week for MBS trends.  Everything about last week should have caused MBS to at least move slightly higher (meaning lower rates). Retail Sales were Dismal, Consumer Sentiment Dropped, a missile was shot over Japan, a London terror attack, and the Atlanta Fed lowered its GDP forecasts.

So, why didn’t MBS rally (or at least move a little higher for lower rates?). This is where it gets interesting as long bond traders have two things weighing on their desire to add to their positions.  First are lower taxes.  Yes Tax Reform has shot way up in probability over the past couple of sessions with Paul Ryan’s press conference earlier in the week as well as Treasury Secretary Mnuchin’s comments and then followed up with a dinner between President Trump and two Democratic leaders making it appear that there could be some actual bi-partisan work in D.C.  Lower corporate taxes and or lower personal taxes would cause our economy to grow at a pace that would be too hot for long bond holders that profit from slow growth and inflation rates so any increase in probability of tax reform actually getting done this year will cause long bond traders to lose interest in holding MBS.

Next is effectively a “white paper” by the Bank of Canada (which unexpectedly hiked their interest rates this month).  This paper and accompanying comments by Senior Deputy Governor Carolyn A. Wilkins, who said that Canada was open to changes in the BoC mandate, has bond traders concerned that we could be up for a MAJOR shift in global central bank policy in 2018.

Keep in mind that the number 2 person in our Fed is gone (Fischer – October) and Yellen is very much in doubt to be re-nominated in 2018.  Even if she did stay, there would be at least 4 Fed Governors that would be appointed by President Trump and a rotation in of 4 district Presidents that are generally more conservative than the current rotation of district voters.

Enter the Bank of Canada where Wilkins says it is appropriate for the BofC to reconsider its mandate and lower the target inflation target (for example from 2.0% to 1.5%) or even remove the inflation target altogether.  This has reminded bond traders that even the N.Y. Fed President (number 3 at our Fed) hinted last month that the Federal Reserve could adjust its own inflation target.

This is all digesting in the long bond traders’ tummies as everyone is awaiting this Wednesday’s FOMC meeting where the market expects that rates and interest rate policy and forward guidance will be unchanged but we will learn about the “great wind-down” as they reduce their monthly MBS purchases.  As one of the largest volume purchasers of all Agency MBS, they will consistently lower their purchases each month….which means consistently more supply available each month and with even a smidge less artificial demand for MBS, it has many bond traders worried.

This is certainly not a “sky is falling” scenario, it simply explains that the sentiment of bond traders (not stock traders) is one of caution making it very difficult to justify bidding up prices.
What to Watch Out For This Week: