Eye On Housing
Following 4 consecutive monthly increases, results from the Mortgage Interest Rate Survey (MIRS) released by the Federal Housing Finance Agency (FHFA) indicate that mortgage rates fell in March 2017*. Over the month, contract rates on mortgages used to purchase single-family newly constructed homes declined by 6 basis points to 4.12 percent. Despite the decline, rates remain above the low of 3.54 percent in October 2016, however, even at this level rates remain historically low.
In the presence of these rates, new homes sales continue to rise. Over the month of March, sales of new single-family homes rose by 5.8 percent to 621,000. Between October 2016 and March 2017, sales of new single-family homes have risen by 9.3 percent, increasing on a monthly basis in each month except December.
The MIRS also found that the loan-to-purchase ratio on newly built homes fell 80 basis points 78.3 percent. Its lowest level since May 2016. At the same time, the inventory of new homes, remains low. A recent post showed that the LTV ratio on newly built homes has been rising for several years and now exceeds its pre-recession peak level. Some analysts have linked the higher leverage with the low inventory. Intuitively, for a given level of housing demand, low inventory of homes would raise house prices, potentially requiring the prospective borrower to take out a larger mortgage.
The chart above explores whether low inventory coincides with a high LTV ratio. The blue line tracks the average LTV ratio on new home sales and the red line captures the months’ supply of new single-family homes. The dotted lines in the figure are the averages over the entire 1964 to 2016 period, 6.0 months for inventory and 76.1 percent for the LTV ratio.
Between 1964 and 1975 the trend in new home inventory tracked that of the LTV. Inventory was below its long-run average and the LTV ratio was moving roughly in tandem. The spike in inventory that took place between 1973 and 1974 was matched by an increase in the LTV ratio over those years. However, in 1975 inventory declined to 5.8, below its long-run average. Meanwhile the LTV ratio was above its long-run average.
Over the ensuing 30 years, 1975 to 2004, periods when the months’ supply was considered low generally coincided with relatively high average LTV ratio. Between 1975 and 1983, the month’s supply moved from 5.8, below its long-run average to 8.6, above its long-run average, and back down to 4.7. At the same time, the LTV went from 76.2, above its long-run average to 73.2, below its long-run average, and back up to 76.6.
Similarly, the upward trend in the months’ supply between 1984 and 1990 to levels above its long-run average coincided with the LTV ratio falling below its long-run average and remain there through 1990. Between 1990 and 2004, months’ supply remained below its long-run average in most years as the LTV was above it during most of the same years.
The 2006 to 2010 period diverged from these trends. First, months’ supply moved above its long-run average while the LTV rose as well. Then, over 2009 and 2010, both months’ supply and LTV fell in the midst of the recession. However, since 2011, the relationship has resumed, months’ supply remains below its long-run average while the LTV ratio exceeds its average.
The chart above highlights the negative statistical relationship between the inventory of homes, months’ supply, and the LTV ratio. However, the fit is low. When the two periods when the relationship did not seem to hold are excluded, 1964-1974 and 2006-2010, the relationship strengthens as shown in the figure below.
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* To conduct this survey, FHFA asks a sample of mortgage lenders to report the terms and conditions on all single-family, fully amortized, purchase-money, nonfarm loans that they close during the last five business days of the month. The survey excludes FHA-insured and VA-guaranteed loans, multifamily loans, mobile home loans, and loans created by refinancing another mortgage.
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