4.9% Gain Shows Buyers Are Adjusting to Modestly Higher Interest Rates
WASHINGTON—Sales of previously-owned homes rose strongly in May but remain shy of last year’s pace, a sign the housing market has tentatively regained its footing this spring.
Sales of existing homes increased 4.9% the past month to a seasonally adjusted annual rate of 4.89 million homes, the National Association of Realtors said Monday. The pace was the highest since October, the last month annualized sales topped the five-million mark.
Coupled with an improvement in April, the May figure points to a housing market that has bounced back from a dismal winter and shows buyers are adjusting to modestly higher interest rates compared with the spring of 2013.
Still, May sales were down 5% from the year-earlier level and the recent rebound could be slowed if interest rates on mortgage loans begin to increase, as many economist project. Because of the sluggish start to 2014, the Realtors group expects a 3% reduction in sales this year compared with 2013’s total of 5.09 million.
“It would be risky to assume this gain marks the start of a sustainable rebound,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. The recent sales gains are largely “a reversal of the winter hit,” and other reports do “not support the idea that demand is recovering,” he said.
After a strong start last year, the pace of home sales began to ease in August before perking up this spring.
The roller coaster coincides with interest rates that jumped a percentage point in the spring of 2013 but have moderated recently, touching a six-month low in May. The average interest rate on a 30-year fixed-rate mortgage stood at 4.17% last week, according to Freddie Mac. FMCC in Your Value Your Change Short position
Lower mortgage rates make home purchases more affordable for borrowers. But Realtors economist Lawrence Yun said he expects rates to start moving back up soon, reaching 5% by the first quarter of 2015.
Rates have edged lower this year even as the Federal Reserve scaled back its bond-buying program designed to push down long-term interest rates. That program is expected to end later this year, and then the Fed will contemplate increasing short-term rates from near zero.
A rate increase, which most Fed officials say will happen next year, likely would put upward pressure on mortgage rates.
Monday’s report showed the median sale price for a home in May was up 5.1% from a year earlier to $213,400. That was the slowest annual gain since March 2012.
The inventory of homes available for sale rose 6% from a year earlier. At the current pace, it would take 5.6 months to exhaust the supply, just below a typical level. The increased inventory drove May’s strong sales pace, said IHS Global Insight U.S. economist Stephanie Karol.
A larger inventory of homes could set up a virtuous cycle where the better selection draws buyers to the market, which sustains price gains, which then entice additional sellers to list. One weak link in that chain, however, could be first-time buyers. The share of first-time buyers fell in May even as sales rose.
“The market can only retain its strength for so long if move-up buyers cannot find a first-time buyer to purchase their starter homes,” Ms. Karol said.
Source: Eric Morath / The Wall Street Journal / June 23, 2014
Link to article.