July Existing Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July Existing Home Sales

KEY DATA: Sales: (Monthly) up 6.5%; Year-over-Year: up 17.2%; Median Prices (Year-over-Year): up 13.7%

IN A NUTSHELL: “Housing activity remains solid but whether that is due to underlying strength or fears of higher mortgage rates is still quite unclear.”

WHAT IT MEANS: The housing market has been a critical component in this still lackluster recovery and the jump in mortgage rates raised questions about the sustainability of the improvement.  At least through July, all is well.  The National Association of Realtors reported that existing home sales surged in July with all regions of the country experiencing a pick up in demand.  Similar gains were posted in both the single-family and condo markets. The annualized sales pace was the highest since November 2009 and has increased at a robust pace over the year.  At the same time, while the number of homes on the market has increased somewhat over the last few months, it is still below where it was a year ago.  This lack of inventory coupled with the surge in demand had the expected impact on prices: they are soaring! And since demand and supply for both segments of the market have moved similarly, the price increases were fairly close with single-family home prices jumping 13.5% and condos up 15.5%.

MARKETS AND FED POLICY IMPLICATIONS: It is great that the housing market is holding up in the face of the jump in mortgage rates but the news is not surprising. Almost every economist has pointed out two simple facts: Mortgage rates are still relatively low keeping affordability fairly high and critically, it is normal that rising rates, especially given how fast they went up, forces people off the fence and pushes buyers to close as soon as possible. I have said many times that I expected demand to rise during the summer with the impact of the rate rise not seen until the fall.  Of course, there will be people who say that the rate increase did not matter.  The reality is that some people will not be eligible for mortgages and some will not be willing or able to pay the higher prices.  That demand, prices and mortgage rates continue to rise together provide some support for the view that sales are being pulled forward.  That doesn’t mean the market will collapse. Rates are still low on an historical basis.  But the rate of sales increases and therefor price gains are likely to decelerate, especially if tapering does start and longer-term rates filter up further, as expected. A five percent mortgage rate by year’s end is hardly unthinkable and that should slow the housing market recovery.  So enjoy the good housing numbers while you can, and investors are likely to do that, but keep in mind that they could be temporary.  As for the Fed, one can only assume they understand consumer behavior and will not assume there has been no negative impact from the rising rates.  The members also have to keep in mind that fiscal policy remains the largest negative and unknown factor for future growth.  That may not prevent the taper from beginning in September but it is a very good reason to push the start date back a little.

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July Existing Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July Existing Home Sales

KEY DATA: Sales: Up 2.3%; 1-Family: Up 2.1%; Condos: Up 4.3%; Median Prices (Year-over-Year): Up 9.4%

IN A NUTSHELL: “With sales and prices rising it is clear that the housing recovery remains on track.”

WHAT IT MEANS: The housing recovery remains intact. The National Association of Realtors reported that housing sales rose in July. Granted, the gain was a little bit less than hoped for and we are still not back to the levels reached earlier in the spring, but up is still good. Modest increases were reported in the South and West but a sharper rise occurred in the Northeast. The problem appears to be in the West where demand was flat. Inventories of distressed homes there are limited and that may be slowing the market down. Indeed, there was a nearly 25% rise in prices in the West over the year and that may have been due more to the dearth of investor properties than a rise in prices. That would skew the purchases more toward non-distressed homes causing the price indices to rise. Of course, a surfeit of distressed homes artificially lowered prices so this may just be some pay back. In comparison, median prices rose between 3.5% and 6.6% in the other regions. Those gains, though, make it clear that home prices are now increasing not falling, a warning to fence-sitting home buyers. Mortgage applications for new purchases were up last week, though those data do bounce around a lot.

MARKETS AND FED POLICY IMPLICATIONS: Progress may be slow, but it is occurring nonetheless and the recovery in the housing market should help future growth. It isn’t just new construction where housing powers economic activity. Within about six to nine months after a gain in home sales retailers start to see rising demand for housing-related products. People buying new or existing units personalize them and that means buying everything from new furniture to window treatments to landscaping. The increasing existing home sales should start leading to more housing-related retail sales though I suspect the lag between the two may be a little longer in this cycle. The Fed is intent on keeping mortgage rates low and that is a help. But a small rise in mortgage rates, when coupled with the rising prices, could help even more as potential buyers are forced to make decisions before their monthly costs get away from them. This is a report that is not strong enough to change anyone’s mind about the state of the economy: It is growing but not rapidly. However, the housing sector has been a key factor in this growth lately and reports like this indicate that should continue.

Note from Christopher J. Brown, CEO:

I feel the market will continue to make great strides. There are five GOOD reasons I see the real estate market making a big comeback:

1) Stock market will suffer losses due to the European debt crisis/situation and China’s reduction in growth;
2) Municipal Bonds will become unattractive as local, county, state and federal governments fail to cut costs and raise taxes;
3) Residential Mortgage-Backed Securities are making a big comeback and offering 7% returns; this will fuel the lenders with new capital and offer better mortgage programs to bring in more buyers;
4) Investors will have nowhere to go but to buy inexpensive houses with low interest rate mortgages to provide a safeguard against tax increases;
5) Employment will increase as the market picks up, bringing in upward mobility and first-time homebuyers.

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RE/MAX Connection Realtors is not a licensed financial advisor and is not providing any financial advice. You should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors only is providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.

Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.

RE/MAX Connection Realtors, 1000 Lincoln Drive East, Suite Two, Marlton, NJ 08053 www.goconnectionnj.com

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