Things appeared to be going swimmingly for the housing market this week. Until Friday, that is.
On the final day of the week, the Commerce Department reported that new-home sales plummeted in July. According to its estimates, sales of new single-family homes decreased during the month by 12.4% on a seasonally adjusted annual basis relative to June. Compared with last year, however, they were up 6.8%.
The typical explanation for the month-to-month drop is that mortgage rates are finally making their way through to the housing market. "It's definitely a rate shock," Fannie Mae's chief economist told Bloomberg News. "You could see another month or two of weak sales, or it could go longer. ... Along the way, there will be some hiccups. This is certainly a hiccup."
Since the beginning of May, the interest rate on a 30-year fixed-rate mortgage has shot considerably higher as bond investors begin to contemplate a future with less help from the Federal Reserve. Over the past 16 weeks alone, they've gone from below 3.4% to above 4.5%. This past Thursday, Freddie Mac estimated that the national average was 4.58%.
The nation's largest mortgage originator, Wells Fargo (NYSE:WFC), added fuel to the fire when it reported on Thursday that it's laying off 2,300 members of its mortgage department. The bank has looked to a robust refinancing wave to spur seven consecutive quarters with more than $100 billion in home loan origination volumes. But now, with refinancing activity down more than 60% over the past few months, the lending giant is finding it necessary to scale back.
That being said, it's nevertheless my opinion that any fear is premature. In the first case, for every negative data point that one can cite, there's also a positive one.
Just this week, the National Association of Realtors released its monthly report showing that existing-home sales skyrocketed in July, up by 17.2% compared with the same month last year. And while the Mortgage Bankers Association acknowledged on Wednesday that overall mortgage applications fell again last week, purchase-money mortgage applications actually climbed by 1% relative to the previous week.
Adding to this optimism were the quarterly results from the nation's largest home-improvement retailers. On Tuesday, Home Depot (NYSE:HD) said that sales at stores open at least a year were up by 10.7% over the same quarter last year. One day later, Lowe's (NYSE:LOW) reported comparable sales of 9.6%. Both companies also notched dramatically improved earnings and revenue figures.
According to the former's CEO, Frank Blake, "The second-quarter results exceeded our expectations as our business benefited from a rebound in our seasonal categories, continued strength in the core of the store, and the recovering housing market in the U.S."
The point is that while it may appear as if mortgage rates are taking a significant toll on the housing market, the most recent evidence is nearly evenly split. In other words, it's still simply too close to call.