Low Inventory and Rising Mortgage Rates Boost Home Sales

by Madhusmita Bora

Existing Home Sales Hit 6.5-Year High

August was a good month for the housing market. According to the National Association of Realtors®, existing home sales jumped 1.7 percent to an annual rate of 5.48 million units. That’s the highest level since February 2007, and it beat economists’ estimates.

The boom in sales was triggered by buyers rushing in to cash in on low mortgage rates, which slowly seem to be trending upward.

 

Analysts polled by Reuters were expecting sales to rise to 5.25 million units.

The spike may be temporary, according to Lawrence Yun, NAR’s chief economist. Many buyers, who were sitting on the fence, recently made a beeline to the market to take advantage of the low mortgage rates and cheaper prices, which are now threatening to increase. In the future, tight inventory could affect sales, Yun said.

Last month, inventory increased slightly and represented 4.9 months’ worth of supply when adjusted to August’s sales pace, according to NAR. An inventory of 6 months’ supply is considered a healthy balance between supply and demand. Many parts of the country have been experiencing a tight market, thereby hampering sales.

“There’s an ongoing housing shortage,” Yun said, “I don’t anticipate this housing shortage to go away.”

Inventory shortage isn’t the only problem. Mortgage rates, which hit a low of 3.35 percent in May, have begun to rise. The rate on 30-year-fixed loans increased to 4.5 percent the week of Sept. 19, almost nearing a two-year high.

“Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions,” he said.

Home Starts Rise

Speaking of inventory, there may soon be a solution to that problem. Home starts for single-family units increased in August. Even better news is that permits for future construction also hit a five-year high. This shows that builders have a lot of confidence in the market despite the spike in mortgage rates.

According to the Commerce Department, single-family starts surged 7 percent to an annual rate of 628,000 units last month. That’s the highest level in six months. Single-family homes are the largest segment of the market.

The schizophrenic apartment and condominium segment also continue to struggle. Groundbreaking on multifamily units dropped 11.1 percent, affecting the overall rise in housing starts. But, there’s no cause for too much worry.

“Homebuilding seems to be holding up decently in the higher mortgage rate environment, probably due to the support of strong underlying fundamentals – thin inventories and steady household formation,” Guy Berger, an economist at RBS in Stamford Connecticut, told Reuters.

Homebuilder Confidence Highest in Eight Years

Homebuilder confidence, a key industry measure, remained steady  at the highest level in almost eight years, according to the National Association of Home Builders/Wells Fargo confidence index.

The measure registered 58, matching August’s reading. That’s the highest level since November 2005. A reading of 50 or more is a sign that builders view market conditions as positive.

“Following a solid run up in builder confidence over the past year, we are seeing a pause in the momentum as consumers wait to see where interest rates settle and as the headwinds of tight credit, shrinking supplies of lots for development and increasing labor costs continue,” David Crowe, the association’s chief economist, said in a statement.

Many believe that even though mortgage rates are on the rise, housing recovery will not end. But, faster job growth and wage increases are essential to keep fueling demand for homes.