Remember, “existing” home sales, or “resales”, are counted at the close of escrow. The real house sale — when the “purchase & pricing decision was made — occurred 30 to 60 days prior when the house went “pending”. This means the local, regional, and national “July” existing sales data we get out this month are backward looking to the point of being almost meaningless, as the they don’t incorporate the “surge” in rates in the back half of June that really hit the market.
For example, for a house that closed escrow on July 1st — that is counted in “July” sales reports out this month — the actual “purchase and pricing decision” may have been made in May, when rates were at or near record lows. Now rates are 40% higher. Even houses that closed escrow in late July could have been from contracts written in early June when rates were 50bps lower than they are today. When people always buy as much house as they can pay for on a “monthly payment basis” using Fannie, Freddie, and FHA loans, even a 1/2% jump in rates is meaningful.
Bottom line: Rates “rose” steadily from mid-may to mid-June. In fact, 10-year notes averaged 2.15% through June 15th…now they are 2.70%. This ‘rise” in rates through June 15th promoted “panic buyer, rate chasers” (PBRC’s) to jump in the market afraid of missing their window. The lion’s share of the PBRC crowd should have closed escrow in July with some carrying over to August. This ‘cohort’ should have boosted “July” closed escrow counts, as they “pulled forward” a ton of demand. Moreover, July had 15% more days than June and one more day than last year in which to close loans. So, net-net expect strong “July” house sales reports this month as the data come out.
Reminiscing of 2010
The rate “rise” from May to mid-June, rate surge in the back half of June, and PBRC’s jumping in the market “before it’s too late” is very reminiscent of the sunset of the 2010 Homebuyer Tax Credit that drove Existing Sales through the roof in the first half of the year. When this was happening everybody was certain housing was in a full-blown recovery and the tax credit was having virtually no effect. Then, the month after the tax credit expired Existing Home Sales plunged 30% in a single month…in the heart of the busy season. For some reason, everybody was shocked. I suspect that after this flood of PBRC’s close escrow in July and August there will appear another air pocket in the housing numbers.
This is where the “July” data become really important…the “extent of the strength”. That is, if the “July” sales that come out over the next couple of weeks are super strong it will make me very concerned that a flood of PBRC’s all jumped in at the same time and pulled-forward so much demand there is nothing behind it. The last thing this fragile housing market needs is another 30% month-over-month drop in house sales in August or September that ushers in a “triple-dip”.
I am not a perma-bear! I am a perma-bull!
Hey, listen…housing had a huge bounce. That’s great. There’s nothing wrong with it taken in context. That is, this was a “stimulus-driven” bounce that will come to an end when the stimulus ends, which it did on the rate surge. Calling it more than that — like a “durable housing market recovery” with several more years of gains in front of it — I believe is disingenuous and will lead to malinvestment ultimately hurting ma and pa homeowner, once again. In fact, in places like Vegas and Phoenix new housing bubbles have already been created and I am afraid it’s too late for many that jumped in head first.
Believe it or not, I am a housing perma-bull. I want everybody who is desirous of — and who can afford to — to own a house. Why not. I want house prices to rise in order to offset inflation…hey, and maybe even rise a little more so every decade one can cash out and buy a car or boat. But what occurred from 2003 to 2007 and again from 2012 to 2013 (much more powerful than the bubble years) is chaos that will end in tears every single time.
Ya know, I am even impressed with what the Obama administration has done with Fannie and Freddie. They are powerhouses once again. I think the HARP refi program has been a success. I am more sanguine on mortgage mods — I think history will judge mortgage mods harshly — but that’s what makes a market I suppose.