Market Perspective

Home Sales, Supply Decline

Overview: A decline in the stock market was positive for mortgage rates over the past week, while recent economic data caused little reaction. As a result, mortgage rates ended a little lower.

The major economic data released over the past week came from the housing sector, and it continued to be somewhat disappointing. In September, sales of previously owned (existing) homes, which make up roughly 90% of the market, fell 3% from August, and they were 4% lower than a year ago. The inventory of existing homes for sale fell slightly from August to a 4.4-month supply. A 6.0-month supply is considered a healthy balance between buyers and sellers. While the labor market remains strong and consumer confidence is high, a number of other factors have been holding back home sales this year. Two of the biggest are rising mortgage rates, which make potential buyers reluctant to give up their existing mortgages, and a lack of inventory in many regions.

The results for new home sales, the remaining 10% of the market, were even worse. In September, sales of new homes fell 6% from August, and they were 13% lower than a year ago. While new home sales are more volatile month to month than existing home sales, they are of greater interest to most investors since they are a more current indicator of activity in the sector. This is because new home sales measure contracts signed, which foreshadow future activity, while existing home sales are based on actual closings.

Week Ahead

Looking ahead, the next European Central Bank (ECB) meeting will take place on Thursday and could influence U.S. mortgage rates. Also on Thursday, in the U.S., the Durable Goods and Pending Home Sales reports will be released. The first reading for third-quarter gross domestic product (GDP), the broadest measure of economic growth, will be released on Friday. The core Personal Consumption Expenditures (PCE) Price Index, the inflation measure favored by the Federal Reserve, will come out on October 29. The next monthly Employment Report will be released on November 2.

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