Today new home sales beat estimates, and new home median sales prices hit an all-time high. What is going on here? My job is always to be the detective, not the troll so let’s take a look at today’s data, as there is a constant theme here that I have talked about for some time. Hopefully, I can make sense of this report, which showed the home sales beat estimates with prices still at all-time highs.

From Census: New Home Sales Sales of new single-family houses in October 2022 were at a seasonally adjusted annual rate of 632,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.5 percent (±20.8 percent)* above the revised September rate of 588,000, but is 5.8 percent (±19.6 percent)* below the October 2021 estimate of 671,000

New home sales haven’t gone anywhere for a few months now, and this report also had negative revisions to the prior reports. The cancellation rates are rising, this is true, but the Census reports don’t properly account for those sales being lost. In theory, the sales levels are lower than the data will show.

Also, these reports are very wild month to month, so we can get a swing back lower in next month’s report. However, with all that said, new home sales are historically low today and have been for some time. We are well below the 2000 recession level and back to 1996 levels.

When you account for a population of over 330 million people, that sales number looks a lot lower than in 2000 and 1996 so be mindful that we are trending at low levels today.

While the actual sales trends can be more downward than the report shows, it’s not off by a significant amount. We are, for now, bouncing off the bottom that we had back in 2018, which was historically low as well.

In 2005, when the housing bubble peaked in sales at around 1.4 million, we had a clear, aggressive downtrend in sales with cancellation rates rising aggressively. Today we are finding a low base for now, because new home sales are historically low. 

I would be careful reading too much into this report or even the current trend. The housing market has been in a recession since June of this year, and we have other data lines that can be more useful in gauging the new home sales sector.

From Census: For Sale Inventory and Months’ Supply The seasonally adjusted estimate of new houses for sale at the end of October was 470,000. This represents a supply of 8.9 months at the current sales rate.

My rule of thumb for anticipating builder behavior is based on the three-month supply average. This also has nothing to do with the existing home sales market; this monthly supply data is only for the new home sales market.

• When supply is 4.3 months, and below, this is an excellent market for builders.
• When supply is 4.4 to 6.4 months, this is an OK market for the builders. They will build as long as new home sales are growing.
• The builders will pull back on construction when the supply is 6.5 months and above.

The existing home sales market has 3.3 months of supply, so we have had a historical gap between new and existing monthly supply for some time now. However, since I started my housing economic work, this has been my rule of thumb: 

The three-month average of monthly supply in the chart above is running at 8.6 months, and the monthly supply headline number did fall for the previous report. This data line has always been key to my work, which has run well with the builder’s confidence data that has gone into waterfall collapse mode, as you can see below. This data line is considered positive when it’s above 50 and currently at 33.

We are still in housing recession land as the builders still have a lot of new construction homes and haven’t started yet to build.

For the builders, 61,000 new homes are completed for sale, amounting to 1.2 months of the supply, and 298,000 new homes are still under construction, while 111,000 haven’t started. The last two data lines account for 7.7 months left in the data.So as you can see, we have a lot of homes that aren’t on the market from the 8.9 months of the supply.  We can see why the builders are done building new single-family houses as they have a lot of work left to do ( Article Link).

From Census: Sales Price The median sales price of new houses sold in October 2022 was $493,000.  The average sales price was $544,000. 

This part of the new home sales data has confused many people per the last few reports because it is true we have hit an all-time high in median sales prices for new homes. Over the past month of social media, I have tried to convey this message about using median sales price data for the new home sales market. This data line can move highly one way or another based on the mix sale shift of prices. This means that getting a report that has an outsized of bigger homes sold can tilt the data aggressively higher.

Earlier in the year, when we saw a more significant percentage dip in median sales prices, this was due to having more smaller-sized homes in the sales mix. Just know that median sales price data always need to be taken with a grain of salt.

Another housing data line reported today was purchase application data, which scored its third straight week of growth, coming in at 3% week over week. That data is still down 41% year over year, but as I’ve said for many months now, the year-over-year comps were going to be very difficult starting from October to January. This means we should expect 35%-45% year-over-year declines to be the norm. Right on schedule, since October we have seen year over year declines range between 39%-46%.

The last time we had three straight weeks of growth in purchase apps was the middle part of June. I caution that we are working from historically low levels, so the bar is low, but after three weeks of growth — and seeing the year-over-year decline become less — this is something worth noting. We will continue to keep an eye on this, especially if mortgage rates head lower.

I understand that the new home sales reports have been confusing at times this year but remember that the trend is your friend. We are working from historically low sales levels, and the builders are pulling out all the stops to sell what homes they can while rates are high.

The new home sales sector improved significantly when mortgage rates dropped to 5%. However, for now, the monthly supply levels are still too high for the builders to start new construction, and we can see they have a lot of work to do with homes still under construction.

With purchase application data showing some life now after mortgage rates have dropped, 2023 is shaping up to be very interesting. For now, I hope you can enjoy the Thanksgiving holiday with your family and eat well!

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Amid surging rates, declining volumes and a reduced appetite from investors in the secondary market, there are a growing number of casualties in the mortgage space, especially in the riskier non-QM segment.

First Guaranty Mortgage Corp. (FGMC), controlled by global investment management firm PIMCO, filed for Chapter 11 bankruptcy protection in June. Michael Strauss’s Sprout Mortgage shut down in July, laying off its staff without paying salaries and severance. Meanwhile, Athas Capital Group is winding down its operations and Impac Mortgage Holdings is backing off the product.   

But right when several companies are turning away from non-QM products, a Colorado-based lender has decided to launch a new division to cater to this market. The question is: why? 

Stronghill Capital – a small-balance commercial lender owned by the $20 billion-plus asset management firm ArrowMark Partners – announced last week it had launched a new residential lending division to provide borrowers with non-QM products, non-agency jumbos and investor programs.

“Probably it seems very counterintuitive when companies are running away from the flames in the fire, to see a company like ours making an announcement that we are going to go full bore running into the fire,” Dustin Wells, recently appointed as the co-president at Stronghill Capital, told Housingwire. 

Stronghill, however, is no stranger to the non-agency and investor loan space. 

The company sells loans via brokers for clients – usually LLCs, C-corps or S-corps – to acquire residential real estate for commercial and investment purposes. Now, business owners can also apply for a mortgage loan as an individual.

“So, for example, if I’m a business owner working with a brokerage to buy five investment properties that I’m going to invest in my LLC, but I also want to buy a new primary residence or a second home, now we can be that one-stop-shop for this client,” he explained. 

According to Wells, Stronghill originates about $500 million a year to real estate investors, employing about 30 staff members, and has “trusted partnerships with warehouse providers in the space to provide credit facilities to fund loans on an ongoing basis.”

With surging rates, lenders are struggling to sell legacy lower-rate loans originated months ago in the secondary market as investors seek higher yields. This liquidity problem caused the implosion of non-QM lenders, but Wells said that by entering the market now, Stronghill “fortunately don’t have any legacy issues like these companies.” 

The company, which operates in wholesale and delegated and non-delegated correspondent channels, will outsource most of the back office work for the new division.

Wells said Stronghill is not competing with wholesale lenders with aggressive pricing, like United Wholesale Mortgage or Homepoint. He said Stronghill’s brokers deal with more “esoteric” cases, while these companies are “built on scalability through simplicity.” Consequently, Deephaven and Angel Oak would be the natural competitors.

Stronghill has licenses in five states for the new division – Arizona, Colorado, Florida, South Carolina and Texas – but is working on getting 44 licenses in total.

Looking forward, Wells said the new division will grow according to, among other things, the Federal Reserve funds rate.

“We’re saying somewhere between $400 million and $500 million is our projection for the residential consumer space heading into next year. And then, depending on where things track in 2023, we could see exponential growth into 2024,” Wells said.

Despite higher rates, Wells said borrowers are looking at purchase loans because there is currently less competition for houses compared to the past two years. 

“Now, you might be paying a higher rate, but you’re able to negotiate on those properties and can work through getting a lower rate in the future,” he said. “But right now, the focus is: Can I get the house at the right price, whereas before, was I going to pay too much?”

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The National Association of Realtors (NAR) reported today on two trends in existing home sales that we have seen for many months now: sales are declining while total inventory data has fallen directly for the three straight months. On a positive note, however, the days on the market are no longer a teenager anymore: that metric grew from 18 days to 21 days.

I cheer because the savagely unhealthy housing market theme I talked about back in February of this year was the same premise of the housing reset talking point the Federal Reserve uses. Total inventory data started at all-time lows at the beginning of 2022, creating more bidding war action in January and February, peaking in March.  

We needed to end this madness before we had prices escalate over 20% for another year. The Federal Reserve wanted to see the bidding wars end and the days on the market grow. This is happening, and in the long run, this is a plus for the housing market. 

When I outlined my 23% five-year growth model for 2020-2024, it was to have a marker for when price growth got too hot. I didn’t have to worry about this in the previous expansion — as my long-term work stated for a decade, the years 2008-2019, would have the weakest housing recovery ever.

We don’t have any housing bubble or overheated demand data, nor can we. This article, which I wrote in 2019, does show you the historical work in the past decade on the housing bubble talk.

However, I knew the years 2020-2024 would see better demand from the bump in demographics. This could potentially put us in a horrible place with inventory, which it did, and prices accelerated beyond my five-year price-growth model in just two years. I am staying consistent with my work and model when I described the housing market in February as savagely unhealthy.

Soon after, the Fed came in with their housing reset premise. Now we are getting the call back to balance, which is good. The positive aspect of today’s data line is that the days on the market grew again, and we are getting off the teenager level.

NAR Research: First-time buyers were responsible for 28% of sales in October; All-cash sales accounted for 26%; Individual investors purchased 16%; Distressed sales represented 1% of sales; Properties typically remained on the market for 21 days in October.

One thing about housing data we all need to be mindful of is that the year-over-year comps will be very challenging until we get to the end of January. Last year starting in October, purchase application data had an abnormal volume rise toward the end of the year. Even though the data was still showing negative year-over-year prints due to COVID-19 comps, the percentage was getting less and volumes were growing.

It was a funky time with housing data last year; people needed to make COVID-19 comp adjustments. As mortgage rates rose more and more, the October to January data was going to show big negative prints.

NAR Research: Total existing-home sales decreased 5.9% from September to a seasonally adjusted annual rate of 4.43 million in October. Year-over-year, sales dropped by 28.4% (down from 6.19 million in October 2021).

I anticipated purchase application data to have 35% to 45% year-over-year declines starting in October. That has occurred right on schedule; the last print came down 46%. If housing data takes another leg lower, we would see negative prints of 53%-57%. The last two weeks have had positive weekly data of +1% and +4%.

Total housing inventory fell in this report, the third report in a row that shows total inventory has decreased. Seasonal impacts are the norm with housing, and new listing data is negative 6% year to date.

We saw new listing data decline when rates got to 6.25% the first time. This is not a positive for the housing market. A traditional seller is primarily a homebuyer, so not only do we lose the inventory for sale when this happens, but we also lose a buyer. This is another factor in driving purchase application data below 2008 levels. However, as we can see, the inventory data looks much different than what we saw in 2000, 2005, 2008, 2012, 2015 and 2018.

NAR lists the current inventory at 1.22 million, while historical normals are between 2 million to 2.5 million, with a peak in 2007 a tad over 4 million. The monthly supply grew from 3.2 months to 3.3 months.

Price growth has been cooling off more noticeably, similar to other periods when mortgage rates rose. However, the extreme level of price growth we had earlier this year was savagely unhealthy, so this news isn’t just welcome — it’s needed to bring balance back.

NAR Research: The median existing-home price for all housing types in October was $379,100, a gain of 6.6% from October 2021 ($355,700), as prices rose in all regions.

With today’s report, we see the continued trend of demand destruction from higher rates and a lack of new listing growth. The severely unhealthy housing market is returning to a B&B marketplace, boring and balanced, but still needs more time.

The parts of the country at 2019 inventory levels are already off my savagely unhealthy list; the rest are still struggling to get more new active listings. The Federal Reserve can help the housing market by saying one sentence about the pivot; however, it’s not there yet, and housing market inflation is their big concern.

Going out for next year, though, the rent inflation data is lagging on the CPI data and is already showing a cooldown. We see the inflation growth rate falling in other data lines as well.

If mortgage rates can get down toward 5%, we can see some stabilizing in the housing data that is working from a much lower bar now. This is the way to get out of the housing recession that started in June. 

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Between the shift towards self-employment and the number of Millennials entering the housing market, the market for non-QM is poised for substantial growth in the year to come. HousingWire recently spoke with John Keratsis, president and CEO of Deephaven Mortgage, about what lenders should be doing to capitalize on the boom in non-QM lending and why our preconceived notions about non-QM could be all wrong. 

HousingWire: Why is now such an important time to prioritize non-QM?

John Keratsis: The timing to get into non-QM couldn’t be better for a couple of reasons. First, the non-QM market is poised for long-term, sustainable growth. This is a direct result of a monumental shift in the US to the self-employed workstyle. Contract or ‘gig’ workers, entrepreneurs and business owners need non-QM mortgages because they may be unable to produce the W-2 tax form used to verify qualifying income for a traditional loan. 

Driving this workstyle change is the largest population cohort in US history: Millennials. As millions of self-employed Millennials settle down and start to raise families, they are looking for their first home. Millennials were born between 1982 and 2000. So, the Millennial homebuying demand is set to continue for a span of eighteen years! 

Right behind the Millennials are the Gen Zers – the third largest population in US history. Gen Zers are also big on the self-employed workstyle. All of which means there will be a sustained demand for non-QM loans for many years to come.  

Another reason to get into non-QM lending at this very moment is diversification. Just about every lender is looking for alternative revenue sources to offset the decline in refinances and the very tight purchase market. Offering non-QM loans provides access to those millions of borrowers who want mortgages but are unable to qualify for a traditional loan. 

The timing is right from the capital markets perspective, too. Residential mortgage credit provides diversification benefits to institutional investors. Historically, RMBS have performed comparatively well during downturns in the stock market. 

HW: How has the growing trend of self-employment led to the need for more robust non-QM products?

JK: Per above, it’s a perfect storm. Millennials, at 72.19 million are the largest population cohort in US history, are now settling down, starting families and looking for their first homes. 

Millennials also make up a vast segment of the largest non-QM borrower cohort: the self-employed. Ironically, the pandemic put homeownership in closer reach for self-employed workers. By making it acceptable to work from anywhere, they are free to move around the country and purchase homes in more affordable geographies where it takes less time to save for the all-important down payment.

HW: Non-QM loans are surrounded by misconceptions. How can lenders debunk myths about non-QM lending?

JK: The biggest misconception is that non-QM is only for borrowers who can’t qualify for a traditional loan due to poor credit. We’ve found that the best way to debunk this is to simply use the facts. In today’s non-QM loan pools, FICO scores can range between 730-740, DTIs generally meet Agency standards and LTVs are in the low 70s. 

Beyond that, it’s important to point out that non-QM, like the traditional market, shifts and evolves with the industry. The rise of self-employed borrowers is one trend. Another is the demand for single-family rental properties. Even industry professionals are surprised to learn that business purpose DSCR (Debt Service Coverage Ratio) loans make up about 30% of our business. America’s aging housing stock is fueling this trend as property investors purchase single-family homes from downsizing baby boomers, fix them up and then use them to generate rental income. This is also another indication of how the non-QM sector continues to evolve to serve shifting industry trends. We have the flexibility to quickly align products and services with market demands, whereas the traditional mortgage market does not. Today, Deephaven can close a DSCR loan in as few as 15 days.

HW: What is Deephaven Mortgage doing to expand non-QM lending?

JK: We know the demand for non-QM loans will only keep growing. We know that investors, attracted by higher yields, want them on the capital markets side. 

To a certain degree, we have to just keep doing what we’re already doing: 1) keep educating lenders, brokers, real estate agents and borrowers about non-QM mortgages; 2) continue to build out both wholesale and correspondent distribution channels; and 3) implement ongoing enhancements to our non-QM customer experience.

At Deephaven, we are continuously running webinars to bring new loan officers into the non-QM fold. We’re investing heavily in technology to create truly seamless service delivery. As demands grows, competition for non-QM loans will, too. The tiebreaker will become the borrower and client experience.

To learn about the opportunities in non-QM lending, visit deephavenmortgage.com. 

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The number of new housing units started in October continued to decline, a reflection of the continued downward spiral in homebuilder sentiment, dropping 4.2% from September to a seasonally adjusted annual rate of 1.425 million, according to a report released Thursday by U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

October’s annual housing start rate was down 8.8% on a year over year basis, according to the report. These declines come after a sharp monthly drop of 8.1% in September.

“October was a challenging month with disappointing inflation data — though more recent readings have been more positive — and soaring interest rates. It is no surprise that home building activity reverted back to a downward trend, though the drop was not as severe as it was expected to be,” Nicole Bachaud, Zillow’s economist, said in a statement.

Decreases in both single family and multifamily homebuilding contributed to the slower pace of building, with the single-family sector posting a 6.1% monthly decline and the multifamily sector falling 0.5% from the month prior.

However, the number of multifamily housing starts is up 17.3% year over year, at an annual pace of 556,000, while the number of single family housing starts is at a pace of 855,000, down 20.8% from a year ago.

Regionally, housing starts were down month over month in the Northeast (-34.7%), Midwest (-11.1%) and West (-10.6%), but they were up 6.7% in the South. On a yearly basis, housing starts were down in the Midwest (-13.6%), South (-1.1%), West (-19.6%), and the Northeast (-15.8%).

“Prices for construction materials and labor remain significantly elevated, though material costs have shown some signs of easing. Prices for steel, plywood, copper, gypsum and concrete all remain significantly higher than pre-pandemic, but recorded month-over-month declines in October,” Odeta Kushi, First American’s deputy chief economist, said in a statement.

“On the labor side, according to the October jobs report, average hourly earnings in construction were up 6.6% on a year-over-year basis, significantly above the pre-pandemic average pace of approximately 2.8 percent,” Kushi said.

In addition to elevated prices, builders are seeing fewer buyers thanks to the rising interest rates and continued affordability issues.

“Affordability is also a concern, as rates remain significantly elevated compared with one year ago,” Kushi said. “The average 30-year, fixed mortgage rate in October was 3.8 percentage points higher than one year ago. Holding income constant, the increase in rates reduced house-buying power by approximately $178,000.”

Reflecting these challenges is the decrease in the number of building permits issued. Overall, building permits were issued as a seasonally adjusted annual rate of 1.526 million, down 2.4% month over month and 10.1% year over year. Both the single family and multifamily sectors recorded monthly drops, decreasing 3.6% and 1.9%, respectively.

Despite these challenges, experts believe there are reasons to be optimistic.

“As builders pull back on starting new projects, they will have greater opportunity to bring to market the large backlog of homes in their pipelines that are already under construction,” Kushi said.

Although the number of housing completions was down 6.4% from September to a seasonally adjusted annual rate of 1.339 million, they were up 6.6% year over year, with both the single family sector (up 2.7%) and multifamily sector (up 18.3%) posting yearly gains.

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