For some time, Street analysts have claimed that the combination of a less robust housing market and higher interest rates would result in slower prepayment speeds. And with the latest releases from the Office of Federal Housing Enterprise Oversight (OFHEO) and National Association of Home Builders (NAHB), they were provided with the data to support their claims.
"The latest releases of the OFHEO home price index and the NAHB data point to a significant slowdown," Barclays Capital said in a recent report. "While speeds have not yet reacted to a slowdown in housing, we expect that as summer seasonals decline, prepayments will decelerate - and the latest data suggest sooner rather than later."
The OFHEO released their quarterly home price index for the first quarter 2006 in two home price indices, purchase-only index and the Refinance and Purchase Index. Analysts only focus on the former, however, as it is a much more stable indicator of housing strength.
The first data that analysts examined was the OFHEO purchase-only home price index for the past 15 years. They found that home price appreciation in the first quarter of this year was 7.2 per annum (annualized quarterly data), which are strong levels by historical standards. Yet, the data also showed a pattern of slowing home price appreciation over the past year - a trend that indicates weakening in the housing market.
Similarly, recent data from the NAHB Housing Market Index (HMI) also seem to hint at a decline in the housing market as builder confidence is dropping to its lowest level since mid-1995. Moreover, the data illustrates higher mortgage rates, housing affordability issues and the retreat of investors and speculators from the market.
According to analysts at Barclays Capital, all of the subcomponents of the HMI index declined in May. The six-month sales outlook fell five points to 54, while the index measuring the traffic of prospective home buyers fell seven points to 32, making the indices near their weakest levels for the past five years.
Prepay outlook
Based on these results, Barclays Capital projects for the June payment report that improving seasonals and a day-count increase will offset higher driving rates. Thus, prepayment speeds would remain about the same, with changes within 1 CPR. It is expected that driving rates should increase about 18 basis points for next month, and then rise another seven basis points for the July report. Seasonals should continue to improve, pushing up turnover to 8% in the June report and 14% in July's. In terms of the August report, a two-day-shorter day count should result in decelerations of 1 to 3 CPR.
"We expect higher mortgage rates for both conventionals and GNMAs to be offset by an increase in day count," analysts concluded. "However, as most GNMA cohorts are currently faster than comparable conventionals, and day-count effects are proportional to speeds, we expect mild accelerations for the June report on GNMAs and unchanged speeds for conventionals."
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