US home sales plummet but weather is no culprit

Sales of new homes in the US plunged 14.5% in March to 384,000 annualized units, the lowest level in eight months. The 14.5% decline was the 3rd biggest monthly drop in 20 years, with the larger declines seen in July 2013 and May 2010 at -17.1% and -33.5% respectively.

More than just bad weather

Two factors helping to invalidate the weather as a reason to slowing activity: i) residential construction was week in warmer parts of the country, which weren’t hit by frigid temperatures; ii) Sales of new homes in the North East rose 12.5%–the only one of the four regions to have registered an increase, remarkably in the region with the most negative weather impact.

Rising prices & higher mortgage rates

The combination of rising mortgage rates and higher prices remained the major culprits of slowing sales as lower priced homes made up for the bulk of the decline in home sales. This suggests that first-time homebuyers and lower income borrowers are finding increased obstacles in affording new homes following the ongoing increase in prices and the rise in mortgage rates, which began last summer.

Earlier this week, we saw sales of existing home sales in March posted their 3^rd monthly decline, hitting 4.9 mln units, the lowest since July 2012. Rising prices and low inventory of distressed homes have kept buyers off the market.  New-home sales account for just over 5% of the residential market but are accumulated once contracts are signed, making them a timelier indicator of home purchases than sales on existing homes.

It’s all about keeping yields down, forget tapering

The bottom panel in the charts below highlights the clear impact of higher interest rates (10-year yield and 30-year mortgage rate) on new and existing home sales. The rise in yields began in May after the infamous Bernanke speech hinted that tapering could start as early as in September due to a premature forward guidance on the unemployment rate. After the speech, 10-year yields rose by nearly 80% in just under four months, while the 30-year mortgage rate surged to 3-year highs.

Tapering eventually did start in December and newly appointed Fed chairman Yellen eventually perfected the art of Fedspeak in guiding yields down by referring to ongoing weakness in labour markets and downside risks to price stability.

The importance of keeping 10-year yields under 2.90%-3.0% is not solely related to keeping the cost of the Federal government’s credit card low, but also that of US home buyers as mortgage rates remain closely tied to them. Thus, we could well see the remaining $55 bn in monthly asset purchases fully tapered by year-end without 10-year yields rising above 3.0% simply by means of Fedspeak. And if that does happen, dollar bulls can continue hibernation even if the ECB offered them the QE bone.