Home sales reach 8-year highs but what comes next?

Gradually rising rates shouldn’t dampen market

Housing activity has strengthened in recent months, as gains in both new and existing home sales in May pushed total sales up to their highest level in eight years.

Analysts say a combination of job creation growth and an overdue upturn in mortgage lending, along with high levels of consumer confidence should ensure that this strength continues.

But for how long, and what could change it? What’s it mean for the rest of 2015?

“From 5.4 million in 2014, we expect total home sales to average at least 5.7 million this year, before rising to around 6 million by 2017. That would be the strongest performance of home sales in 10 years,” says Ed Stansfield, chief property economist for Capital Economics.

Stansfield says events both domestic and abroad are either good for housing, or won’t have any negative affect.

“The U.S. economy and financial system’s links with Greece are minimal, while exports to the entire EU accounted for just 1.5% of US GDP last year. As a result, further turmoil in the region – even a Greek exit from the euro-zone – is unlikely to throw the economy off course,” Stansfield says. “What’s more, beyond a temporary impact on investor sentiment, the slump in China’s equity market is unlikely to have much effect on the US economy either.”

Indeed, he said, evidence of a second quarter rebound in economic growth is now widespread.

On the issue of the job market, June’s Employment Report looked fairly strong, with non-farm payrolls rising by 223,000 and the unemployment rate falling to 5.3%.

Looking deeper, though, the details were mixed.

There were downward revisions to previous payrolls figures, while the drop in the unemployment rate was largely due to a sizeable decline in the labor force, which shows an underlying weakness.

Then there’s the issue of mortgage rates. Mortgage interest rates have risen steadily in recent months.

At 4.17% on average in June, the MBA’s measure of 30-year fixed mortgage rates was at its highest level since November last year, having increased by around 30 bps in the past two months alone.

But recently, Stansfield noted, Treasury yields have dropped back due to increased safe-haven flows resulting from the crisis in the euro-zone.

“It’s possible that mortgage rates could therefore follow yields lower, at least in the short term,” he said.

Indeed, that’s what happened. Mortgage rates stopped their upward trend and dropped back down due to global uncertainty, the latest Freddie Mac Primary Mortgage Market Survey said.

The 30-year fixed-rate mortgage averaged 4.04% for the week ended July 9, down fromlast week’s average of 4.08%. A year ago, the 30-year FRM averaged 4.15%.

Still, the inevitable rise won’t hit housing too hard, Stansfield argued.

“The 1% point rise in mortgage interest rates will not be enough to cause a significant deterioration in affordability,” he said. “We estimate that the average monthly mortgage payment equates to around 15% of median family income. We expect this to rise to no more than 18% by the end of next year.”

Home purchase applications once again weathered the rise in interest rates by edging up by 1% in June from May’s levels.

“The pace of growth has certainly slowed, and there is still a significant gap between applications and home sales. Nonetheless, the conditions seem to be in place for a more meaningful, sustained upturn,” he said.

For the first time in at least five years, most consumers think that now would be a good time to sell a home, if recent surveys are right.

May home prices nationwide, including distressed sales, increased by 6.3% in May 2015 compared with May 2014, according to the home price report from CoreLogic (CLGX).

This change represents 39 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 1.7% in May 2015 compared with April 2015.

“Mortgage rates on 30-year fixed-rate loans remained below 4% through May, helping to fuel home-purchase activity,” said Frank Nothaft, chief economist for CoreLogic. “Our homes-for-sale listing data shows that markets with high demand and limited supply, such as San Francisco, are recording double-digit appreciation rates over the past year.”

The surge in the rate of monthly price gains shown by the CoreLogic index at the start of the year always looked odd when the economy contracted in the first quarter and consumer spending was unusually weak, Stansfield said.

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