Mortgage Rates are at New Lows. Where are the Home Buyers?

Will the Fed push them off the fence?

Mortgage applications for both new homes and refinancings remain flat despite mortgage rates hitting the lows for the cycle.  In fact, while traditional 30 year loans are at 6.2%, 15 year mortgages checked in at 5.71% recently.

Will the Fed spur the potential buyers off the sidelines.  Not so fast.  It’s all in the details.

Where are the home buyers?

The short answer is that, as I’ve chronicled of late, many potential home buyers are probably renting because mortgage payments are beyond their current means.  Indeed, shelter costs in the most recent CPI were up 5.4% year over year.  It’s helpful to understand this metric, as it’s the largest contributor to CPI.

According to the U.S. Bureau of Labor Statistics (BLS), there are two components to shelter costs:

1)     Owner’s equivalent rent – the amount of money the owner of a home would pay to live in the home as a renter; and

2)     Rent for primary residence – the amount an actual renter pays to live in a home.

In the August CPI report, the owner’s equivalent rent rose by 0.5% and the rent index rose by 0.4%, month over month.  The composite shelter index rose 5.2% year over year, but homeowners are getting the worst end of the deal as the cost of owning a home remains high.   In contrast, while renting expenses have risen 4.97% year over year, the yearly rate in CPI was down from July’s 5.09%, which may mark, at least an intermediate term top.  Recent data from Redfin also confirms that even though rents remain high by historical standards, they are flattening out after topping out in August 2022.

Perhaps the most interesting data form Redfin’s recent rental market report is that rents in the sunbelt are falling the fastest.  Specifically, the report notes that rents in Austin, Texas have fallen 17.6% year over year – down $317 on average. San Diego, Jacksonville, San Francisco, and Tampa rounded out the top five cities where rents have dropped the fastest.  Meanwhile, the median home price rose 7.3% over the same period, clocking in at $439,000 compared to 409,000 in July 2023.

Thus, the real issue is whether a Fed rate cut will move the undecided off the fence and into home ownership.  We’ll find out on September 18, 2024. 

The key, however, remains affordability.  Right now, it’s cheaper to rent for a significant number of potential buyers.

Field Report

On the ground, things remain awfully quiet.  Those houses I keep an eye on are still not selling, although there is some on and off activity with lookers showing up here and there, especially on weekends.  On the other hand, the prices are starting to come down, as the newly built townhomes I monitor just reduced the asking price by 5%.  

Moreover, on my usual weekend drive by, some of the higher priced homes that were on the market a few weeks ago are still unsold.  Meanwhile, new construction sites are starting to sprout up although it’s too early to tell whether they will be residential or commercial.  I would not be surprised to see more apartment buildings.  I’d be very surprised to see more warehouses, although I’m keeping an eye out for data centers.

There is also an interesting development I’m keeping an eye on as well.  It’s located near a busy intersection near Highway 121 in an attractive part of the bustling DFW suburb of Frisco.  It features a nifty looking lumber framed building featuring space for offices and supporting businesses – coffee shops, restaurants, niche retail - with an adjacent apartment/town house complex. The landscaping, the shell spacing, and the parking lot are finished and the place looks ready to roll.  The apartments are entering their final phase of construction, yet the commercial side is still not showing signs of any new tenants.  However, it doesn’t even have any signs suggesting it’s ready to go. 

Bonds and Mortgages

Despite the stock market’s post CPI temper tantrum, the U.S. Ten Year Note yield (TNX) remains below 4%.  And while it is possible that we may see a short term reversal, as the yield is near its recent cycle lows, the odds of a move above 4%, barring a sudden burst of inflation, are well below even.

Mortgage rates continue to mirror TNX. Thus, they remain near the lows for the cycle.  With the Fed likely to lower rates by 0.25% on 9/18, what mortgages do in response will likely tip the balance regarding potential homeowners.

Money Flows – Homebuilders and REITs Remain in Consolidation as Trades Wait for the Fed

Investors should remain patient when it comes to homebuilder stocks. In my own account, I’ve been adding small numbers of shares with each dip recently. This is due to the structural changes in the housing market, which will keep supplies tight and continue to favor homebuilders.

The iShares U.S. Home Construction ETF (ITB) continues to find support at its 20-day moving average. Investors can use this support level as a place to add to shares.

The iShares U.S. Real Estate ETF (IYR) is overbought as the RSI is above 70.  Expect some backing and filling here. As with ITB, the 20-day moving average has proven to be excellent support. 

For details on which homebuilders and REITs offer the best opportunities in this market, check out a Two Week Free Trial to Joe Duarte in the Money Options.com.  If you’re an active trader, I just recommended a homebuilder stock which a great short term trading profile at my Smart Money Passport active trading service.

Bottom Line

We continue in a short term pendulum swing between REITs and homebuilders. Yet because of the secular changes in the housing market (prolonged shortages of homes to own and plenty of new apartments for rent), we can expect to see consolidation in both sectors in the short term.

On the other hand, given the potential for lower mortgage rates over the next six to twelve months, the odds of another up leg in homebuilders seem to be on the rise.  Over the long term, both sectors remain very favorable.

In the short term much depends on what happens with the Fed and the election.  So, until November, things could still be bumpy.

Heartfelt thanks to everyone for your ongoing support.  I really appreciate it.

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