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No, This Is Not the Last Hurrah for the Housing Recovery
Jonathan Smoke / Hanley Wood / September 20, 2013
Earlier this week the National Association of Realtors reported that existing home sales were up in August over July when most economists were expecting a decline. Instead, the pace of sales in August was at the highest level since February 2007. Let me make one more important historical comparison. If we exclude 2002-2006 from our data set because of the abnormal level of activity in the heart of the housing boom, there have only been 5 other months in history (going back to 1968) that existing single-family home sales have been higher: January and February 2007, August and December 2001, and June 1999.
This level of home sale activity is not just so-so, it is incredible by any standard other than the not so real bubble period.
Yet this data does not fit the template of what some very loud people want us all to buy into. They want us to buy into the notion that the housing recovery is on the ropes due to increasing mortgage rates. In fact, if you had to bet on why the Fed blinked this week on tapering, fear about their actions hurting housing was likely high on their list. After all, Jim Cramer has been screaming about it for weeks.
The problem is that there is no solid evidence backing up the hypothesis that the rise in rates we have already experienced is putting a damper on housing. I would argue just the opposite seems to be unfolding in front of us.
According to our analysis of deed recordings available so far from August, the average mortgage rate on non-distressed resale closings is already up 10% or 36 basis points since June, when the average mortgage rate on resale closings was at the lowest point on record.
That means that real applied mortgage rates are already up, yet the pace of sales is increasing, not declining. Granted, the real applied mortgage rates are not up as much as the published 30 year fixed rate, but according to our data, what’s in the newspaper is rarely what the homebuyer actually gets in the mortgage.
And the pace of existing home sales is not up because of investors and cash purchases. According to our data, investor activity declined modestly in August over July, and is down 3% year-over-year. Cash-only resales were flat in August compared to July but down 2% year-over-year.
On Monday we heard from the National Association of Homebuilders that builder confidence remained unchanged at a near 8 year high in September. These folks are on the front line. We will formally comment on our collected builder sales and traffic data next week, but I can tell you already that bellwether markets like Houston are already reporting that sales and traffic were both up in August over July. In Houston, traffic and sales were both up by more than 3% over July. Those are non-seasonally adjusted numbers, folks. New home contracts signed in August will have higher mortgage rates when closed compared to rates earlier this year.
Finally, according to survey data, consumers are not backing away from viewing today’s rates as tempting. We fielded an annual study of active home shoppers this June, when the published 30 year fixed mortgage rate was already up over 60 basis points from the beginning of the year. Yet, 39% of shoppers said that favorable interest rates were one of things that triggered them to consider purchasing a new home.
Even if mortgage rates are less attractive now than they were six months ago, they are not likely to be more attractive in the long run. Many households postponed moving or buying a home for many years. 31% of shoppers said that being tired of their current home triggered them to consider purchasing a new home. 51% of shoppers said that a change in family size is what was prompting their search for a new home. Last time I checked people don’t plan for marriage, divorce, or a new child based on what Freddie Mac says the 30 year fixed rate is.
So let the talking heads scream away. Mortgage rates have already jumped in anticipation of the taper that hasn’t yet happened. And yet consumers keep shopping and buying because at least in part they have more faith that homes and mortgages are likely to be more expensive tomorrow than today.
If you are tired of where you’ve been living for far too long or your life is dictating the need for a different home, it still looks like a great time to buy.