US Housing Market Heats Up Even As Broader Economy Gives Off Mixed Signals

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Historically low interest rates and consistent job growth have fueled America’s housing recovery, which appears to have swung into high gear in the second quarter despite alarming trends in other parts of the economy.

A range of indicators from home sales to homebuilder confidence have improved in recent months, pointing to a gradually improving economy. However, an underperforming manufacturing sector and a corporate recession on Wall Street mean the Federal Reserve is unlikely to raise interest rates anytime soon. Fed fund futures indicate a less than 50% chance the central bank hikes interest rates before the new year, according to the CME Group’s FedWatch tool.[1] Low interest rates are a boon to the housing market because it means buyers can lock-in at favorable mortgage rates.

What’s more, the Federal Reserve’s latest guidance on interest rates gave no indication that monetary policy would change anytime soon. In fact, six policymakers expect only one rate increase this year. In March, only one policymaker thought rates would rise only once this year.

In keeping interest rates near rock bottom, the Fed commented that “the housing sector has continued to improve” since the beginning of the year, but weaker net exports, soft business investment and unexpected weakness in the jobs market last month are enough to keep policy on hold for a whole longer.[2]

The average commitment rate on a 30-year fixed rate mortgage was 3.54% in the latest week, according to Freddie Mac. Rates have actually drifted lower this year, falling from a high of 3.92% in the second week of January.

30 Year Fixed Rate Mortgage by Week 2016 | GoRion Blog

Low mortgage rates have stimulated sales across the new and existing single-family housing market. Latest figures from the National Association of Realtors showed that existing home sales rose 1.7% in April to a seasonally adjusted annual rate of 5.45 million. Sales were especially robust in the Midwest, where home prices still tend to be the most affordable. The nationwide median price of an existing home was $232,500 in April, up 6.3% from year-ago levels.[3]

New home sales – one of the more volatile segments of the market – recorded their biggest gain in 24 years in April. The sale of new single-family homes jumped 16.6% to a seasonally adjusted annual rate of 619,000, the highest level in more than eight years, the Commerce Department reported last month.

Increased sales and buyer traffic have pushed homebuilder confidence to six-month highs. The Wells Fargo/National Association of Home Builders (NAHB) housing market index (HMI) rose two points to 60 in June on a scale where a reading above 50 is generally associated with a favorable outlook on sales and overall activity.

“Rising home sales, an improving economy and the fact that the HMI gauge measuring future sales expectations is running at an eight-month high are all positive factors indicating that the housing market should continue to move forward in the second half of 2016,” NAHB chief economist Robert Dietz said in a statement.[4]

Rising home prices have certainly been reflected in the value of US housing stock, which has gradually increased since bottoming in 2010. The value of US home equity, which is the difference between the value of US housing stock and the amount of single-family mortgage debt outstanding, has increased in recent years. By the end of 2015, US home equity was worth $12.5 trillion, still below the record high of $13.3 trillion in 2006.[5]

The continuation of the housing recovery will depend in large part on strong jobs growth and steady wage increases. US job creation slowed to a shockingly low 38,000 in May, the weakest pace of hiring in nearly six years. This has many market participants concerned that the labor market growth engine that has been responsible for consumer spending and home buying is finally beginning to slow. What’s more concerning about last month’s jobs report was the unemployment rate. The unemployment rate plunged to 4.7% from 5%. While this looks good on paper, it was primarily due to around half a million people exiting the workforce.

It remains to be seen whether this was just a blip on the radar or the start of a more frightening trend. We will likely get more insights next month with the release of the June nonfarm payrolls report.

[1] CME Group. FedWatch Tool.

[2] Federal Reserve (June 15, 2016)

[3] National Association of Realtors (May 20, 2016). Existing-Home Sales Rise in April for Second Straight Month.

[4] National Association of Home Builders (June 16, 2016). Builder Confidence Rises Two Points in June.

[5] National Association of Home Builders (June 16, 2016). Builder Confidence Rises Two Points in June.

This article was written exclusively for GoRion.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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