Housing Nirvana Gets Slapped By Higher Rates

   With that said the beat on July Existing home sales isn't surprising, I was looking for the number 5.26 million and it came in a bit higher than that at 5.39 million. However looking for the next 6-8 months the drop in mortgage purchase apps will be felt   For example,  all  my July, August and even September closings were done with Pre Qualification before June and a majority of those Pre Q's are still in the process of buying a home.  After July the drop in volume of new Pre Q's makes evident that rates have cooled the buying frenzy we saw here in Southern California. 

  New home sales on the other hand looked very soft. The number came in at  394,000 and the expectations was for 475,000. This has more of a reality of the current interest rate cycle and the vicious spike in mortgage rates we have seen since May 1, 2013. 

Anyone remember Ivy Zelmen's Housing Nirvana Interview on CNBC  on March 7, 2013?  (http://www.cnbc.com/id/100533720)
It seems that a 100 basis point  increase on mortgage rates created a shock value that has cooled down housing from its fever pitch.  Further, home since her interview, home builders stocks has not performed well either.

I do  agree with Ivy  in terms of construction expansion because of population growth and household formation. However, we need to move away from this theme that we have this great housing expansion. A market which contains more than 30% cash buyers is not a traditional buyers market.

 

Here in Orange County:

  In March of 2013 2/3rd of all buyers, based on median  Incomes to median prices, were priced out already. Now that rates have risen housing inflation is doing a number on Debt to income Ratios and personal budgets for home cost. This is something that the financial media has ignored. People do actually have their own budgets for homes so we can't assume people will push themselves to 43% DTi ratios.

 

Now Prices:

Let's take a look at a real time example.   A few months ago my neighbor's model of home sold for $490,000, traffic was good and there was strong interest on the home.   He felt encouraged about listing his for sale.  But 10 days into the market my neighbor has already dropped his price from $485,000 to $475,000.   Keep in mind that this property is in a hot area in Irvine, California where there are  deep pockets and great incomes. Now is 15K a real big deal?    If you're talking about a trend softening, then yes.  The open houses have been less lively but I am sure he will sell his home soon. So for sure rates rising and more supply coming to the market here in Orange County has kept prices from getting more bubbly. 

 

 Now does this mean the housing market is crumbling and the uptrend is broken?   No, I'm not saying that at all. Just showing the facts on the ground that before rates rose there was a fever pitch with multiple bids, strong purchase applications, and a good vibe in housing. Now things have been impacted. So,  I believe July existing home sales will most likely be the peak for 2013. Moving forward, if the cash buyer doesn't pick up the slack from the mortgage buyers then the pace of sales will take a hit and with more supply coming to the market place we have seen a softening on price gains as well.