WASHINGTON, DC-Even as the housing market recovery continues gathering steam, there are signs of the recovery faltering. Although National Association of Realtors data showed that existing home sales—including condominiums and co-ops along with single-family houses—rose 6.5% in July from the month before, US Commerce Department figures issued Friday showed sales of newly built product dropped more than twice as fast as those of previously owned homes increased, losing 13.4% to 394,000. The specter of rising interest rates may have both helped existing home sales and hindered transactions involving new stock.
NAR’s chief economist, Lawrence Yun, alluded to this in comments on the July spike in existing home sales. “Mortgage interest rates are at the highest level in two years, pushing some buyers off the sidelines,” he said last week. “The initial rise in interest rates provided strong incentive for closing deals. However, further rate increases will diminish the pool of eligible buyers.”
Similarly, Julie Zisfein, senior associate and economist with Auction.com Research, sounded a cautionary note in discussing positive indicators. In this case, the good news was the Federal Housing Finance Agency’s report that US home prices rose a seasonally adjusted 2.1% during the second quarter.
Coupled with the NAR July figures on existing home sales, the FHFA Q2 report supports “a continued housing recovery at a time when many housing indicators are pointing in different directions,” Zisfein said last week. “We nevertheless caution that the underlying demand factors for housing have ebbed recently and the recent sales data was boosted by households rushing to close in the face of higher mortgage rates, so coming months could be softer than the current indicators.”
In a weekly emailing, IHS Global Insights economists Doug Handler, Paul Edelstein and David Deull commented that the rise in rates stemmed in part from the Federal Reserve raising the possibility of tapering off on quantitative easing sooner rather than later. “The interest-rate-sensitive housing market is feeling the impact of the 100 basis-point jump in mortgage rates since May that was brought on by the Fed’s taper talk,” they wrote.
“Existing home sales jumped 6.5% last month to 5.39 million, but these sales were based on contracts signed as far back as May, prior to the worst of the increase in rates,” the IHS economists noted. They added that August sales numbers should provide “a better reading on the housing market, and the 16% drop in mortgage applications to purchase a home suggest that we are facing a pause.”
Speaking of tapering off, Redfin reported that the speed at which homes sold declined in July for the third month in a row. During the month, 29.2% percent of homes went under contract within 14 days, compared to 30% in June and 32% the month prior, although July’s market was still healthier than its counterpart of 12 months earlier.
On the other hand, Zisfein noted that the FHFA index rose 7.2% year-over-year, marking the strongest annual growth since early 2006. “US home prices are now 10.6% off their 2011 trough but still remain 12% off their 2007 peak at the height of the housing bubble,” she said.