Morning Report: Home values are looking stretched against incomes

Vital Statistics:

S&P futures4,2403.8
Oil (WTI)73.660.84
10 year government bond yield 1.49%
30 year fixed rate mortgage 3.23%

Stocks are flattish this morning on no major news. Bonds and MBS are up small.

As the economy recovers, the number of loans in forbearance continues to fall. According to the MBA, the share of loans in forbearance fell below 4% last week. Fannie and Freddie loans are now 2.05%, while private label and portfolio loans are 7.98%. Ginnie Mae loans fell to 5.15%.

Mortgage Applications increased by 2.1% last week as purchases rose 1% and refis rose 3%. “Despite the jump in rates, refinances increased for the second consecutive week, pushed higher by a 4 percent bump in conventional refinance applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications have regained an upward trend over the past few weeks. Activity was slightly higher for the third straight week, but remained lower than the same week a year ago. Government purchase applications drove most of last week’s increase, which also contributed to a slightly lower overall average purchase loan size.”

Existing home sales fell 0.9% in May, according to NAR. They came in at a seasonally-adjusted annual rate of 5.8 million. Lack of supply remains the biggest issue, however first-time homebuyers are bumping up against affordability constraints. The median home price rose 23.6% (!) to $353,300. While that growth rate is exaggerated by the COVID-19 lockdowns of a year ago, home prices are rising at a rapid clip.

There were 1.23 million units for sale at the end of May, which represents a 2.4 month supply at the current run rate. This is barely above the record low established in April. Homes sold in 17 days. First time homebuyers were 31% of total purchases, down from 34% in April.

Historically, home prices have tracked incomes pretty closely. If you look at the median home price divided by median income, it tends to stay in a range of 3.5 – 5 times or so. Note that Census data ends in 2019, so the graph is somewhat dated.

With the current median home price at 353k and the latest estimate of median income at $66.8k, that puts the ratio at 5.3 times, which according to the graph above is a record. Now to be fair, median incomes and home prices don’t tell the whole story because interest rates matter. The better calculation would be to look at the the percentage of median income the 30 year fixed rate mortgage payment would be. That said, we have pretty strong evidence here that home prices are stretched vis a vis incomes.

JP Morgan is making an investment in Maxex, which is trading $1 billion in mortgages a month. It is focusing on private label securitizations, which have been coming back as Fannie and Freddie restrict their purchases of investment loans.

I find it surprising that Intercontinental Exchange, which owns the New York Stock Exchange, Ellie Mae and MERS doesn’t have a mortgage exchange. It seems like a natural fit.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: