Key Measures of Housing Market Confidence and Sentiment Rebounding - 5.17.2023

by Ryan Schoen , Sr. Insight Analyst

Quick Hit Summary for Loan Officers

Builders and consumers are becoming more optimistic about the future direction of the housing market. Builders are jazzed that existing home inventory remains low funneling potential homebuyers to new construction housing options and consumers are upbeat that mortgage rates will trend down. However, the fly in the ointment is that both of these developing stories mean that home prices (shelter inflation) will continue to heat up once again making the Fed’s job of taming inflation complicated.

Key Points and Stats

1. Builder confidence in rose 5 points in May to the midpoint mark of 50 for the first time in 10 months (July 2022) with all three component indices rising.
2. Home purchase sentiment increased in April to its highest level since May 2022, jumping 5.5 points to 66.8 (the largest monthly increase in over 2 years).
3. 22% of consumers thought mortgage rates would go down, compared to only 12% the prior month.
4. 23% of respondents indicated that now is a good time to buy a home.
5. 62% believed now was a good time to sell a home.
6. The NY Fed estimates that during the 7 quarters of the refi boom (2Q2020 through 4Q2021) 14 million mortgages were refinanced, accounting for nearly one-third of the outstanding mortgage balances and an additional 17% of mortgages outstanding were refreshed through home sales during a time of high demand for housing.
7. During the refi boom 64% of the refinances were “rate refinances” (classified as those with a balance increase of less than 5% of the borrowing amount). For the rate refinancers, the average monthly payment dropped by $220. For cash-out refinances, it’s estimated that 5 million borrowers extracted $430 billion in home equity during the refi boom with the average amount cashed out at $82,000 and the average monthly payment increased by $150.

Builder Confidence Rising

Builder confidence in the market for newly-built single-family homes rose 5 points in May to the midpoint mark of 50 for the first time in 10 months (July 2022). The lack of existing inventory for sale in the housing market continues to frustrate home buyers, driving them to new construction, which has fueled cautious optimism among home builders.

All three major component indices posted gains in May:

1. The index gauging current sales conditions rose 5 points to 56.
2. The component charting sales expectations in the next six months increased by 7 points to 57.
3. The gauge measuring the traffic of prospective buyers increased 2 points to 33.
4. The rebound in these indicators points to a potential rebound in housing starts as well due to the index’s strong correlation.

New construction is currently and will likely continue to play an increased role in the housing market. Historically speaking, new construction typically represents just 13% of homes listed for sale. However, in March that share increased to 33%.

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Many current homeowners responsible for adding to the existing housing supply when they sell are choosing to stay put and hold on to their second homes and investment properties due to having interest rates well below the current going market rate for a new mortgage or owning their home(s) free and clear leaving little to no incentive to make a move outside of life events.

As we covered last week, the lack of supply has led to increased competition in the marketplace once again especially when first-time homebuyers look to purchase a home and don’t offset net supply by simultaneously listing another property. The same can be said of cash buyers if we assume that cash buyers intend to rent out the property after their purchase. This puts a floor on home prices declining and will likely discourage current homeowners even further from listing their homes for sale as they speculate of increasing gains on their asset continuing.

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The rebound in home prices has home builders starting to rethink their strategy as well. The survey hinted that incentives continue to play an important, but decreasing role in the sales process:

• The share of builders reducing home prices dropped to 27% in May (down from 30% in April, 31% in February / March, and 36% last November).
• The average price reduction remained at 6% (unchanged over the past four months).
• 54% of builders offered some type of incentive in May (down from 59% in April and 62% last December).?

Consumer Sentiment to Purchase a Home Rising

A similar rebound is playing out in consumer sentiment to purchase a home as well. Fannie Mae published an update for their Home Purchase Sentiment Index (HPSI) showing an increase in April to its highest level since May 2022, jumping 5.5 points to 66.8. This month’s increase was the largest in over two years.

Even though all six of the HPSI’s components increased month-over-month, the primary driver of increased optimism was mortgage rate expectations.

Doug Duncan, Fannie Mae Senior Vice President, and Chief Economist put it like this:

An increased number of respondents indicated they think mortgage rates will go down over the next year, a belief that could be due to a combination of factors, including an awareness of decelerating inflation, market suggestions that monetary conditions will ease in the not-too-distant future, and, of course, actual mortgage rate declines during the month.

However, the bump in optimism may prove to be temporary, as consumers continue to report uncertainty about the direction of home prices – and we know that high home prices remain the primary reason given by consumers who think it’s a bad time to buy a home. Until affordability improves for a larger swath of the homebuying public, we believe home sales will remain subdued compared to previous years.

While 22% of consumers thought mortgage rates would go down, compared to only 12% in March which would improve affordability slightly. It wasn’t enough to materially improve net consumer sentiment around buying a home. Only 23% of respondents indicated that now is a good time to buy a home. Meanwhile, 62% believed now was a good time to sell a home.?

At the end of the day, the takeaway from these two reports indicates a mixed housing market. Home builders are optimistic, home sellers remain stingy, home buyers will likely find the current housing market difficult to navigate, home sales will remain low, and home prices will likely continue to heat up once again making the Fed’s job of taming inflation complicated.

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The Great Pandemic Mortgage Refinance Boom

So how did we get here? Well, The New York Fed attempts to answer that in their recently published research telling the refi boom tale that will have an impact for decades to come.

During the 7 quarters of the refi boom, from the second quarter of 2020 to the fourth quarter of 2021, 14 million mortgages were refinanced, accounting for nearly one-third of the outstanding mortgage balances and an additional 17% of mortgages outstanding were refreshed through home sales during a time of high demand for housing. By the first quarter of 2023, incentives to refinance were harder to find as mortgage rates moved north at a historic pace pushing the refinance share of mortgage originations down to just 15.5% of the market.

Reflecting on the refi boom that was, tells us that under 9 % of the mortgages that had been originated before 2010 that were still in repayment in 2020 were refinanced, 17% of mortgages originated between 2010 and 2014 were refinanced, and nearly a third of mortgages from 2015 and later vintages.

The NY Fed estimates that 64% of the refinances were “rate refinances” (classified as those with a balance increase of less than 5% of the borrowing amount). For the rate refinancers, the average monthly payment dropped by $220.

For cash-out refinances, it’s estimated that 5 million borrowers extracted $430 billion in home equity during the refi boom with the average amount cashed out at $82,000 and the average monthly payment increased by $150. However, relative to disposable personal income the amount of equity extracted is not nearly as consequential as the 2002-05 refi boom indicating less speculation and more necessity in setting households up for financial success.?

As for those who refinanced, based on the remaining balance, less than 10% of the mortgages with balances below $100,000 outstanding as of the first quarter of 2020 were subsequently refinanced, compared to nearly half of the mortgages with balances between $400,000 and $500,000, with the propensity to refinance starting to decline after $500,000 which makes sense since the gain from refinancing is directly proportional to the balance refinanced.

Owners now looking to move will face increased borrowing costs and higher prices, with current home prices being more than 36% higher than they had been pre-pandemic. The improved cash flow generated, and the equity extracted by the recent refinance boom should provide significant support to future household consumption for those that were able to take advantage of the unprecedented period of events that transpired.

?Resources:

1. Housing Market Index?
2. Fannie Mae National Housing Survey?
3. The Great Pandemic Mortgage Refinance Boom