Garnet Capital Advisors Blog

April 23, 2014

Sharp drop in new home sales could affect loan sales by cutting supply

New home sales dropped sharply in March, and this development could combine with more stringent lending standards to affect loan sales by reducing the supply of debt.

Together, these headwinds could impact transactions of both performing and non-performing debt. 

New home sales fell to a seasonally-adjusted rate of 384,000 in March, according to data from both the U.S. Census Bureau and the Department of Housing and Urban Development. This figure represented a 14.5 percent decline from the 449,000 properties that sold in February.

Home sales fall short of forecasts
It also lagged every single forecast provided by economists participating in a Bloomberg poll. The median prediction of market experts called for a seasonally-adjusted rate of 450,000. Ryan Sweet, a senior economist at Moody's Analytics Inc., spoke to the various factors that drove the sharp decline in new home sales.

"It's the reduction in affordability, the lack of inventory, also weak growth in median household income - all these are contributing to the sluggish recovery in housing," said Sweet, according to the news source. "It's going to raise concerns about the strength of the housing recovery, but it's too early to be too worried."

Economists stated that the sharp drop in home sales - the opposite of the predicted increase - might indicate that the housing market has grown weak, Reuters reported. However, they noted that challenging weather conditions could have undermined activity.

Various factors affect housing market
Even without considering these seasonal challenges, a dearth of available homes, higher mortgage rates and rising prices could have all contributed to the lackluster sales, according to the news source.

"The rise in interest rates and prices of new homes is leaving some potential buyers with sticker shock," Bill Banfield, vice president of mortgage lender Quicken, told the media outlet.

Borrowing costs could potentially move higher as the Federal Reserve pulls back in terms of using stimulus. The central bank has started tapering its monthly bond purchases and has also provided some guidance on when it might increase its benchmark borrowing costs. Many market experts have warned that gradually paring down quantitative easing would push borrowing costs higher by reducing the available money supply.

Since the aforementioned headwinds could affect loan sales, financial institutions interested in these transactions might benefit from consulting Garnet Capital Advisors, which has significant experience in this area.