Daily Forecast Update: Mortgage Applications and New Home Sales

October 28, 2009

By Lawrence Yun, Chief Economist

Bad news. Mortgage applications for home purchases have been falling the past three weeks in October. This is likely due to the realization that buyers may not be able to meet the deadline to claim the home buyer tax credit. The settlement, not contract signing, must occur by the end of November.
Good news. There will likely be a vote and a passage in Congress this week to extend the deadline to the middle or end of next year. That extension will assure that the housing market gets firmly back on track for a sustainable recovery. Only when home values show consistent stabilization or modest increases will the 'consumer fear factor' no longer be at play. Home values are near stabilization but not yet. So extending the deadline makes good economic sense.
Bad news at first sight but not really bad in reality. New home sales fell in September, which could be interpreted as falling housing demand. In reality, the lower sales reflect deep cuts in new home construction. Home builders need to be cautious about not adding too much inventory. Also, builders are having difficulty financing projects. So, not surprisingly, homebuilding activity is weak and hence automatically new home sales will be low also. The gauge for housing demand should be from existing home sales, which have been on a good upward trend in the past six months.

Mortgage applications for both home purchases and refinancing fell last week. The purchase index slid by 5.2 percent in the past week is down by 17 percent from recent peak. Refinance activity dipped by 16 percent in the past week.
Due to consolidation in the financial industry and some firms going out of business, it is not clear if there are larger measurement errors in this data series now than before. Also, the incidence of all-cash home purchase has been rising and mortgage data will not be picking this information.

New home sales fell by 3.6 percent in September to 402,000 units (a seasonally adjusted annualized pace).
The South and the West regions experienced the largest declines.
The sales pace has been essentially stuck at near 400,000 in the past four months. Tax credit incentives have led people to buy more homes, but primarily for existing homes.
Despite the weak sales pace, the inventory is not alarming at a 7.5 months' supply. Huge cut backs in building activity has held back inventory. The absolute raw inventory of vacant new homes now matches the level that prevailed in years prior to the housing boom years. In short, inventory is back to normal for new homes.
The latest median price for a new home was $204,800, which is a decline by 10 percent from one year ago.
Part of the decline reflects a lower construction cost. Another component is likely due to builders concentrating on smaller-sized homes.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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