June 25, 2013

Booming Housing Market Boosts U.S. Economy

New home sales rose 29% in May, and mortgage rates are edging into the mid-4% range as Bernanke considers a reduction in Fed stimulus

With new home sales 29% higher than they were a year ago and home prices rising, the real estate market has established itself as a leading force in keeping the U.S. economy buoyant.

About 476,000 new single-family houses were sold in May, up 2.1% from April and fully 29% higher than the estimate of 369,000 in May 2012, according to data released jointly on Tuesday by the U.S. Census Bureau and the Department of Housing and Urban Development. Economists in a MarketWatch poll had predicted May sales would reach 464,000.

Not only were new homes selling at the highest rate since mid-2008, but sales for the prior three months were all revised higher. Around the U.S., purchases rose the most in the Midwest, up 40.7%, followed by the Northeast, up 20.7%. Sales in the South dropped, however, by 9%.

A Strong Year for Builders

“The best year for new home sales since 2008 continues apace,” wrote Steve Blitz, chief economist with ITG Investment Research, in a comment released shortly after the report came out. “In sum, the state of the new homes for sale market is that it is recovering, still has a very long way to go, but the balance within the industry between sales and inventory make it a strong year for builders despite the still depressed level of activity.”

In addition, single-family home prices in the S&P/Case Shiller composite index for 20 metropolitan areas were reported as 1.7% higher in April on a seasonally adjusted basis, reaching their biggest annual increase in seven years and surpassing analysts’ expectations for a 1.2% gain. Prices rose 12.1% year over year for their biggest annual gain since March 2006. According to the Census/HUD report, which measures prices differently, the median price of new homes dropped 3.2% to $263,900 last month from a record high of $272,600 in April.

Younger Americans show signs of contributing to the upward trend in the U.S. housing market. A Harris Interactive survey by MortgageMarvel.com released on June 19 found that among Americans ages 18 to 34, a total of 41% (46% of men and 36% of women) said they were interested in buying a home this year. Of those, 17% of men and 6% of women said their finances were shaky, but they still thought they could swing buying a home this year.

Mortgage Rates Up as Bernanke Eyes Backing Off QE

Meanwhile, mortgage rates are rising — an interesting turn of events considering Federal Reserve Chairman Ben Bernanke’s recent comments about tapering the Fed’s quantitative easing program. Residential rates have reached the mid-4% mark, a percentage point above last year’s record lows.

 “Rates on 30-year fixed mortgages hit 4.25% on Thursday, up from 4.12% on Wednesday morning before the Fed chairman, Ben S. Bernanke, signaled the central bank might begin easing back on stimulus efforts later this year,” The New York Times reported on June 20.

ITG Investment Research’s Blitz noted that from the Fed’s perspective, the bounce in home sales is in line with the improved U.S. employment picture.

“Pushing rates lower is no longer the best tactic, while it is still way too early to push rates higher,” Blitz wrote. “To the extent higher real interest rates reflect a stronger economy and, in turn, better employment growth, we could expect much better home sales regardless of where the market is pricing 30-year fixed [mortgages]. People should not automatically assume higher mortgage rates, by themselves, will necessarily damage home sales.”

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Read Taper Tantrum: Markets Recoil, Advisors Scramble on Fed News at AdvisorOne.

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