July 30, 2018
Mortgages were mostly unchanged last week among the modest sell-off in Treasuries, continuing to preserve the meaningful outperformance from the previous week. The favorable macro environment, with yields being largely range bound and implied volatility hovering close to multi-year lows, has acted as a tailwind for the mortgage sector. Last week, 15-year MBS spreads to Treasuries were unchanged, while 30-year MBS spreads moved slightly tighter to Treasuries.
The economic data on housing was less than flattering last week, as new and existing home sales weakened. Existing home sales, which account for nearly 90% of U.S. home sales, declined 2.2% from a year ago in June. They have dropped YoY for four consecutive months. Sales of new U.S. single-family homes fell to an eight-month low in June, dropping 5.3%, the lowest level since October 2017.
Activity increased last week with investors focused on the following:
- Seasoned 15-year 2.5s and 3.0s – The vast majority of what traded last week was MBS with these two coupons. The flat yield curve and relative value in these coupons has driven investors to this segment. There continues to be a relatively small pay up over TBA for pools with seasoning between 18 to 36 months. In some cases, investors can potentially receive less price volatility and greater stability of cash flows relative to new pools, for a modest trade-off in projected yield. Please see the latest Strategic Insight discussing the current merits of slightly seasoned, below par 15-year MBS.
- 15-Year 3.5s and 4.0s
- 20-Year 4.0s – Seasoned pools (150-160 WAM)
- FNMA DUS and Freddie K’s – Focus in this sector was primarily on 7-year finals with 5.0% coupons.
- 30-Year 5.0s – Investors have focused on new issue pools with higher coupons. These structures offer monthly cash flow, a moderate average life, and a meaningful spread to Treasuries. The 12-month total return remains positive, even under a +100 bps scenario.
Mortgage Rates and Refinance Activity
- Benchmark mortgage rates moved higher for the week ending 7/27.
- 15-year mortgage rates increased 7bps to 3.86%, 41bps above the 12-month average of 3.45%, and 14bps above the YTD average of 3.72%.
- 30-year mortgage rates also increased by 7bps to 4.44%, 34bps above the 12-month average of 4.10%, and 13bps above the YTD average.
- 15-year mortgage rates have increased 66bps in 2018, while 30-year mortgage rates are up 59bps YTD.
Mortgage Applications: Mortgage applications for the week ending July 20 fell a meager 0.2% as purchase apps dropped 1.0% and refi apps rose 0.9%. Refinance apps remain very depressed with their 4-week average now down to its lowest level since 2000. Purchase apps (4-week average) continue to grind higher but remain well below their volumes from 2000 to 2009.
Existing Home Sales Dropped Unexpectedly as Supply/Demand Tensions Persisted: Existing home sales fell 0.6% in June, the third monthly decline and disappointing expectations for a modest 0.2% uptick. The 5.38MM-unit pace matched the 2018 low and was near the bottom of the range over the last two years. The current three-month losing streak, in which sales are down 3.9%, marks the longest stretch since a six-month run that ended in January 2014. That period, plagued by mortgage rates surging in the wake of the infamous taper tantrum, saw total sales drop 9.7%. The details of the current report showed mixed activity across the four major regions. Sales in the Northeast (smallest by volume) were up 5.9% and activity in the Midwest (second by volume) inched 0.8% higher. On the softer side, contract closings dropped 2.6% in the West (third by volume) and 2.2% in the South (largest by volume). Sales in the South were down for a fourth month in a row, the longest downtrend since the 16-month drop that wrapped up in April 2008. The disappointment seems to remain supply driven. The median days a home was listed for sale, reflective of buyer interest, was a brisk 26 days for a third month. That kept pressure on prices with both the median ($276.9k) and average ($314.9k) sales price reaching new record highs. However, there was a silver lining for supply. Inventories grew on a YoY basis for the first time since May 2015 which pushed months’ supply up to 4.3 months, matching the highest since September 2016.
New Home Sales Slumped, Adding to Concerns of Housing Slowdown: New home sales slumped a sharper-than-expected 5.3% in June to their slowest pace in eight months. Total annualized sales slipped to 631k units compared to estimates for a smaller decline to 668k. Adding to the disappointment, the combined tally from the prior three months was revised down 27k units and the YoY gain of 1.8% was the weakest since August 2017. Activity firmed in the Northeast, the smallest region by volume, while contract signings in the three other regions slowed: listed high to low by volume, South -7.7%, West -5.2%, and Midwest -13.4%. Unlike the trends in the existing home sales from earlier in the week, both the median and average price ticked down. The median price fell for a third month in a row to $302,100, the lowest since February 2017 as lower priced homes continued to account for a larger share of total sales . Homes with a price tag greater than $400k accounted for 27.6% of total sales, the lowest share since October 2016, while homes between $150k to $299k accounted for 46.6%, the highest since February 2017. Supply-side metrics showed a cycle-high of 301k new homes were in inventory at the end of June, which when combined with the slower sales pace, pushed months’ supply up to 5.7, the highest since last August. After the June report, the general uptrend for new home sales that persisted from 2011 to 2017 appears to have leveled out, compounding the effects of weaker existing sales in stirring concerns of a housing slowdown.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG