The MBA Purchase Index falls 3.5% for the week ending December 20
The MBA Purchase Index dropped by 3.5% last week, which makes sense given that the ten-year bond sold off a couple basis points. More and more builders are noticing a drop in traffic, and the previously unaffected Lennar (LEN) and KB Home (KBH) recently disclosed a drop in traffic during their fourth quarter earnings conference calls last week. Last quarter, PulteGroup (PHM) did note that the first-time homebuyer was pulling back due to higher rates. Beazer Homes (BZH) saw the same thing. Pulte and Beazer are more geographically diversified than KB or Lennar, and they focus more on the first-time homebuyer.
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Unlike the MBA Refinance Index, the MBA Purchase Index is driven by seasonal factors. The purchase index somewhat understates the true activity going on in the market, as professionals who are cash buyers have been responsible for a large chunk of the buying. The index won’t count their activity. The real estate cycle starts picking up in late winter, and the selling season peaks in the summer, lasting until late fall. We’re heading into the seasonally slow period. For mortgage bankers, this could be a tough season, as they won’t have refinance activity to fall back on. Indeed, many of the big mortgage bankers have announced job cuts in their mortgage units.
Ever since rates bottomed in late April, the MBA Purchase Index has declined much less than the refinance index. This steadiness is largely because homebuyers tend to be less interest rate–sensitive than refinances, which are 100% interest rate–driven. Higher interest rates aren’t expected to impact purchase activity the way they affect refinance activity. Despite the rise in rates, housing remains highly affordable.
Implications for homebuilders
We’re pretty much through earnings season for the builders, and most beat reduced expectations. Prices are rising, but orders are slowing. That said, there’s still restricted supply. While housing is rebounding, it’s important to remember that these numbers are coming from an extremely depressed base. Prior to the housing bust, we only rarely observed a housing starts number below 1 million—usually at the lowest point of a recession. In November, we rose above 1 million starts for the second time since 2008. Housing starts have been dropping since March, but the drop appears to have been driven more by multi-family construction (which tends to be volatile) than single-family residential construction.
The homebuilders like Lennar (LEN), KB Home (KBH), Toll Brothers (TOL), PulteGroup (PHM), and Standard Pacific (SPF) have leveled off since spring, but we’re still very, very early in the housing recovery. This is because first-time homebuyers have been absent due to tough credit conditions and a difficult labor market. As those circumstances change, the market will release a lot of pent-up demand, which should drive homebuilder earnings for quite some time.