As mortgage rates continue to fall, so too are home sales. That wouldn't make sense in a normal housing market, but these are very unique times.
Credit, or lack thereof, coupled with extremely weak consumer confidence is keeping potential buyers on the fence.
Contracts to purchase existing homes plunged a far weaker-than-expected 11.6 percent in April, the heart of the spring housing season.
The National Association of Realtors' Pending Home Sales Index is now 26 percent below its cyclical high in April of 2010, which was the deadline for the now-expired home buyer tax credit.
"The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months," said NAR chief economist Lawrence Yun.
The drop in new contracts comes as mortgage rates continue to fall, just last week to the lowest level of the year so far. Freddie Mac reported 4.60 percent on the 30-year fixed, but analysts say even that's not enough to move this tough housing market.
"Because mortgage rates have been so historically low for so long, the law of diminishing of returns has set in with respect to the low rates being the main influence and catalyst in purchasing a home," says Peter Boockvar of Miller Tabak.
"Pricing, job outlook and access to credit will remain the key factors influencing the decision to buy a home, and I don’t think those reasons will superseded by another move down in mortgage rates in getting a buyer off the fence," Tabak went on to say.
Only the Northeast saw a slight bump up in new sales contracts, barely 2 percent. The South led the drop, down 17 percent, but that was largely du to extremely bad weather. Still the Midwest and West posted drops of 10 and 9 percent respectively.
The Realtors also blame tight mortgage underwriting for the drop in sales and today called on the banks to start moving more money.
"A robust economic and housing market recovery cannot occur as long as banks continue to hold onto huge cash reserves,” writes Yun in the report.
“We simply have to get back to sound, common-sense lending standards to provide mortgages to creditworthy borrowers who are buying homes well within their means. Bank balance sheets show rising cash reserves and declining loan balances – it’s time to loosen the purse strings,” Yun added.
The Numbers:
Contracts to purchase existing homes down 11.6% in the middle of what is supposed to be a seasonally strong spring selling season. And, the home sales index 26% below 2010 tax credit levels.
Scant signs of demand is negative, a big negative for the housing market. There's too much supply and a large percentage of home sales are distressed sales, the numbers in real estate are still bearish!
While the economy on Main Street has yet to show any real improvement!!
Tight Credit?
Realtors complaining about credit too tight! This is still the most absurd thought on the planet. Credit is not that tight, it's actually more normal and prudent than anything else. We've moved away from ridiculously loose lending standards to more prudent norms, which feels tight. While it's tighter than it was, we have not reached unnecessarily tight credit standards, yet.
Instead of Realtors complaining about credit, they should complain about the government trying to artificially prop up the real estate market, and support letting it go. It's only when we correct past a fundamentally prudent ratio of values to incomes AND wash out all this distressed real estate, will we have a normal or relatively more normal real estate market.
Loose lending and/or government intervention are the things we should be screaming to get away from for the long run health of the real estate market.
NAR Chief Economist Lawrence Yun
1) "The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months," Yes, but that's rather obvious at this point in the process.
2) "A robust economic and housing market recovery cannot occur as long as banks continue to hold onto huge cash reserves,” Banks are required to hold a certain amount in reserves for future losses, and in recent months the major banks have been moving money out of those reserves, which has helped to boost net income the past few quarters. The majors have released reserves.
3) “We simply have to get back to sound, common-sense lending standards to provide mortgages to creditworthy borrowers who are buying homes well within their means. Bank balance sheets show rising cash reserves and declining loan balances – it’s time to loosen the purse strings,” Yun added.
Okay, this is the quote that really irks me. In the same conversation he states we need to get back to common sense lending by essentially loosening the purse strings! Dumb, Dumb, Dumb.
People who qualify for credit can get credit, sure it might be a royal pain in the you know what to get, but "credit worthy" borrowers can get financing. As a banker, I'm still making new loans to people and businesses who demonstrate the means to repay the loan. Is the process tougher? Yes. Is the underwriting more thorough? Yes. Do you need to talk to more than one bank? Often. However, people who are credit worthy are getting credit!
The Law of Diminishing Returns:
"Because mortgage rates have been so historically low for so long, the law of diminishing of returns has set in with respect to the low rates being the main influence and catalyst in purchasing a home," says Peter Boockvar of Miller Tabak. Great quote!
Low rates have been about the only positive for real estate, but it has been out matched by too many negative favors!
How About the Law of Negative Returns?
Maybe people are afraid to take on a new purchase at a super low rate in fear of losing the equity or down payment. Lower rates do not make up for lost money, and that might be what people are afraid of in earnest. Therefore, lower rates will not help in the near term.
If we reach Critical Mass, it's this fear component that could cause a water fall event where national values drop by 5%, 10%, or 15% in a very short period of time.
What economists and market gurus do not want to say is, "The healthiest thing for the real estate market in the long run, might by a water fall in values or panic correction, or maybe a couple!"
Lower prices might be the one thing that puts an end to the sad real estate economy. Maybe a free market correction based on supply and demand and fear and greed will wash out all this nonsense, and maybe then we can have healthy real estate dynamics.
Hope all is well.
J.D. Rosendahl, Rosey