The record-breaking numbers for June new and existing home sales reported by the National Association of Realtors last week mean faster prepayment speeds on discount coupons, analysts said.

"New home sales, existing home sales, and mortgage applications for purchase all set record highs in June," said RBS Greenwich Capital. Chief Economist Stephen Stanley "In short, housing demand is on fire."

New home sales jumped in June to a new historical high, increasing 4% to 1.374 million units annually. Meanwhile, previously owned homes sales rose to a seasonally adjusted annual rate of 7.33 million units, up 2.7% from the May sales numbers.

Stanley added that ultimately the economy is either going to have to give way, which he considers unlikely, or both fixed- and floating- rate mortgages are going to soar across the board. He bets on the latter, although he warns that it is going to take a painful downtrade on the long end to get mortgage rates to levels that would meaningfully dampen housing demand.

UBS analysts stated that the strong home sales data does not considerably bolster current baseline turnover speeds, which they estimate at roughly 8.4 CPR currently, compared to just eight CPR in 2004. "Rather we believe that it is strong home price appreciation which has driven stronger turnover speeds," penned UBS analysts, although strong home sales and strong home prices have somewhat of a correlation as homeowners typically use robust housing prices not to move homes but to cash out. Analysts predict that increased cash-out activity, now equivalent to four to five CPR, and roughly one CPR of fixed-to-arm refis lead to 13 to 14 CPR speeds on discount fixed-rate 30-year cohorts.

Implications for the relationship between speeds and home price appreciation are considerable, UBS analysts added, noting that if home price appreciation result in faster discount speeds, then as it slows, speeds will follow suit. Furthermore, and more importantly, changes in sales are probably going to become a leading indicator for slower home price appreciation since lessening housing demand would take some time to work through to prices. "Thus a potential decline in home sales should offer a glimpse of slower discount speeds on the horizon," according to the report. But until then, they expect turnover levels to remain robust and be somewhat rate-driven, considering the rate sensitivity of cashouts.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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