Using a MarketNsight study of 18 cities across the country, Builder Magazine’s John Hunt explores how, in spite of nearly a decade of positive job growth and population growth, the U.S. housing market is still anywhere from 30% to 60% below pre-recession levels.

In the “old normal” (before the 2003 to 2006 bubble), Hunt says first-time buyers and first-move-up buyers made up 60% of all new home sales. Buyers typically entered the market for the first time by the age of 25, started a family, and moved to larger homes around age 32. Currently, however, that demographic accounts for less than 40% of new home sales. The profile of today’s first-time buyer reveals an average age of 33-years-old, with this aging trend not changing any time soon.

“There have been countless articles written about millennials’ absence from the new home market,” says Hunt. “It comes down to this – we cannot give them what they want, where they want it, at a price they can afford… yet. We are in the very early stages of seeing some much-needed innovation in our industry, aimed at recapturing a small percentage of that all-important first-time buyer.”

Hunt uses the retail sector as an example of how desperately innovation is needed. He talks of a reset in that all-important industry, with thousands of brick and mortar locations closing last year with that pace now quickening. “Changes in shopping habits, driven by technology and millennials, have caught many traditional retailers unprepared. We would do well to take note of this in our industry,” says Hunt.

Anyone in the housing industry who was around back in the late ‘90s and early 2000s may recall how slow builders were slow to embrace using the Internet, instead paying for huge display ads in local newspapers, which were, in general, already going the way of the dodo. Hunt says the housing industry has been slow to innovate, essentially building the same house today that it built 40 years ago. “Our last major innovation was also brought about by a technological revolution – the sewer. As sewer lines reached farther out from city centers, we saw the 1950s and 1960s brick ranches on a half-acre give way to the five, four-and-a-door homes of the 1980s…and there we stopped. We did not innovate from 2000 to 2006 because there was no need.” After that? Well, we know what that market looked like.

Hunt recalls truly believing that the apartment industry was going to over-build beginning 3 or 4 years ago, citing rising rental rates that would beckon renters to become homeowners. But now he says he and other experts were all wrong. “The old rules in housing simply do not apply anymore,” he says. “A quick check of the rental rates and square footages in your core counties might surprise you.”

Today’s first time home buyers, as well as other demographics of buyers, are willing to pay high prices for much smaller spaces in their preferred locations and Hunt says some pioneering builders and developers are taking notice of this and choosing to compete.

This means condos and townhomes, located where buyers want to live, are gaining in popularity so fast that no one seems to care about the common-wall-air-space-monthly-fees thing anymore. Also thrown into this mix are tiny homes within good commute distances to metro areas.

MarketNsight’s study reveals millennials are not alone, with Baby Boomers vying for the same homes in a market when housing is already tight. With kids are gone and retirement imminent, young-at-heart older buyers prefer to leave the suburbs behind and move to where the action is. All this means is that experiences and location are the new rock stars of housing, with square footage rapidly becoming the poor stepchild.

Conventional overnment (FHA and VA) lenders set their rates based on the pricing of Mortgageand G-Backed Securities (MBS) which are traded in real time, all day in the bond market.  This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events.  When MBS pricing goes up, mortgage rates or pricing generally goes down.  When they fall, mortgage pricing goes up.  Tracking these securities real-time is critical.  For more information about the rate market, contact me directly.  I’m among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Neutral

Mortgage rates are trending sideways this morning.  Last week the MBS market improved by +12bps.  This was not enough to significantly improve rates last week. Mortgage rates stayed in a very tight channel throughout the week.

This Week’s Rate Forecast: Neutral

Three Things: These are the three things that have the greatest ability to impact your mortgage rates this week. 1) Trade wars, 2) Geopolitical and 3) Inflation.

1) Trade wars: This story continues to suck all of the oxygen out of the room. The initial tit-for-tat $34B in tariffs with China is less of a concern to long bond traders than what comes next. Does this escalate to a $200B war? Is there some agreement on some items that decrease the $34B down to $10B? Will progress be made on other fronts (NAFTA, Europe, etc).

2) Geopolitical: A lot going on this week with Brexit taking on center stage as their Brexit Secretary just quit. President Trump will be traveling to the U.K. to meet with Prime Minister May and will be at the NATO summit on Wednesday and Thursday. Trump is also expected to announce his appointment for the Supreme Court, and the bond market will react based upon if they are pro-business/less regulation or not.

3) Inflation: This week’s Consumer Price Index will get a lot of attention as the YOY reading is expected to climb to 2.3%. An important story will be the impact of tariffs on raw material costs (PPI) and if the higher costs have transferred to the consumer in the form of higher prices.

Treasury auctions this week:

• 07/10 3 year note
• 07/11 10 year note
• 07/12 30 year bond

The Fed:

• 07/09 FOMC Neel Kashkari, ECB Draghi
• 07/11 Bank of Canada Interest Rate Decision, ECB Non-Monetary Meeting, Bank of England’s Carney and FOMC John Williams
• 07/12 FOMC Patrick Harker
• 07/13 FOMC Raphael Bostic

This Week’s Potential Volatility: Average

Markets have shrugged off the trade war news.  If the trade tensions escalate, we could see it start to affect markets in a more meaningful way.  Otherwise , once again look for rates to move sideways with relatively low volatility.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.