US Dollar: Housing Steadier than it Seems

Analysts have described U.S housing as having lost momentum, yet if you strip out recent regulatory changes is the picture still as bad?

New Home Sales in the U.S rose by 4.3%, to 490k in November, compared to the previous month, which saw sales revised down from 10.7% to 6.4% and 495k total sales to 470k, according to data published by the U.S Census Bureau.

According to many commentators the sharp down-ward revision in October was the only reason for the apparently positive 4.3% gain in November.

The figures were characterised as showing that the housing market has lost momentum - take the headline below, which was one of several on the theme:

“Americans appear less inclined to buy new homes as the year ends. Sales improved in November only because fewer people bought new homes in October than initially reported.” The Canadian Press.

Another marginally less emotive headline ran as follows:

“New U.S. single-family home sales in November rose less than expected and the prior month's increase was revised down, suggesting some loss of momentum in the housing market.” CNBC. 

Whilst this appeared clear initially, the picture was complicated by a possible negative effect from the introduction of new Federal Mortgage Disclosure Rules on October 3rd. 

Impact of New Regulations

The new rules have been introduced to improve transparency in the mortgage market and provide buyers with more information on which to base decisions.

Nevertheless they have been criticised for delaying the house purchasing process.

The rules included the distribution of substantial and comprehensive documentation to buyers at several stages before closure:

“Three days after your application, expect a three-page loan-estimate form specifying every detail of your loan and what it is expected to cost you.” According to report by Reuters. 

Then towards the end of the buying process:

“Three days before closing you’ll receive a five-page document known as the closing disclosure.

This contains a thorough breakdown of the home loan and the terms that come with it.”

Despite the upsides to consumers, the new rules have been blamed for:

“Delayed closings will occur frequently, and not just during the initial growing pains phase, as any last-minute changes will require a new closing-disclosure form followed by a mandated three-day waiting period before closing.” Reuters. 

Analysts at BBVA had pointed out the new regulations probably explained the massive -10.5% decline in Existing Home Sales in November.

In addition, the November figures may have been further spoiled by a probable ‘rushing through’ of more house purchase deals in October to avoid the new regulation. 

Impact on New Home Sales

According to reports in the media, New Homes were not affected by the new regulations because they are counted differently to Existing Home Sales.

New Home Sales are counted at a much earlier stage in the house-buying process when contracts are signed, whilst Existing Home Sales are counted when the deal is finally closed:

“New home sales are counted when contracts are signed, meaning they likely were unaffected by the new mortgage disclosure rules, which have lengthened the closing time for home purchase contracts.” (Reuters).

Nevertheless, it is possible to argue that the regulatory environment could still impact on ‘signings’ and therefore New Home Sales too, at least to some degree.

Suppose, for example, that September’s low New Home Sales figure (a 10-month low) could be explained as resulting from some buyers being encouraged by realtors to rush signing in August so as to have more chance of closing the deal before the introduction of the new regulation, and therefore stealing some of the demand meant for September?

Impatient homebuyers wishing to skip all the new red-tape, may well have been tempted to sign more quickly than usual, which could plausibly explain the high August figure of 507k.

This may also have contributed to the large rise in October New Home Sales of 10.7%, since it represented a rise from a very low bar of 447k in the previous month of September (a 10-month low).

Although the October figure was revised down it still came out at 6.4%, which is relatively high.

This effect may explain why November appeared relatively slow compared to October - because October appeared relatively high compared to September.

It is theoretically plausible that the new Federal Mortgage Loan regulation may have had a wider impact on New Home Sales as well, which led to the results released to markets on Wednesday.

It is not certain that the data necessarily pointed to a slow-down in the momentum of the housing market to as great an extent as analysts have implied, and housing may be steadier than previously assumed.

Laura Cooper of RBC Economics, for example,was quite upbeat about the data, saying they were indicative of continued strength in the market:

“The pace of new home sales strengthened for the second consecutive month in November further to retrace an outsized drop in September and, encouragingly, indicated a potential turnaround for new home sales.”

Nevertheless she too points to the softening in the re-sale market due to regulation:

“Activity is still tracking slightly below the third-quarter 2015 average of 483,000 annualized units through October and November (at 480,000 units) and comes after yesterday’s reported 12.1% plunge in the single-family component of existing home sales.

The latter was attributed to a lengthening of closing times resulting from the new ‘Know Before You Owe rule’, and as the sector adjusts to the changes, we expect that single-family home sales will likely return to a trend level in December.”