Are Higher Mortgage Rates Boosting Home Sales? Nobody Knows.
Are higher mortgage rates helping or hurting home sales? That’s been one of the biggest unexpected conundrums that economists have run into of late, as there’s data to support both conclusions. Just so we’re all on the same page, let’s review what’s happened to mortgage rates over the past few months.
by John Maxfield, The Motley Fool – Sep 22nd 2013
We started the year out at historically low levels. Weekly data collected by Freddie Mac shows that the average rate on a 30-year fixed rate mortgage oscillated around 3.5% for much of the first half of the year, even dipping below 3.4% on two occasions.
All this changed, however, in May, as investors convinced themselves that the Federal Reserve would reduce its support for the economy and thereby drive long-term borrowing costs higher. Needless to say, it was a self-fulfilling prophecy.
In the months that followed, the cost of a home loan shot up by more than 100 basis points, ultimately settling in around 4.5%.
Looking at that chart, one would be excused for thinking that the housing market must be suffering. Like anything else, mortgage volumes are a function of supply and demand. And demand is a function of price — that is, the interest rate. As the price goes up, demand goes down.
This is exactly what we’ve seen.
Since the beginning of May, purchase-money mortgage applications are down by 16%, says the Mortgage Bankers Association. And many of the nation’s largest mortgage lenders are forecasting even sharper declines for overall mortgage activity.
At a recent industry conference, Timothy Sloan, the chief financial officer of Wells Fargo , predicted that the bank’s home loan volumes would drop to $80 billion in the third quarter. That’s off the more than $100 billion that it’s originated for each of the past seven quarters.
Sloan’s counterpart at JPMorgan Chase made things sound even worse. “In the second quarter, we told you that if rates remained at these levels, we would expect volumes to be reduced by 30% to 40% in the second half of this year versus the first half on the back of a dramatic reduction in refinance volume,” CFO Marianne Lake said.
“This is indeed … what we’re experiencing, and all of Fannie, Freddie, and the [Mortgage Bankers Association] agree that the volume reduction will be 35% flat.”
But here’s where it gets interesting.
The underlying data from the housing market itself appears to be accelerating in the face of these headwinds. Just last week, the National Association of Realtors released its estimate of existing-home sales for the month of August.
How do you think they fared?
Even though July witnessed a 6.5% sequential surge in sales of previously owned homes, they continued to climb in August. On a year-over-year basis, they were up by more than 13%, coming in at the highest level in six and a half years.
The reason? According to the trade group’s chief economist, Lawrence Yun, “Rising mortgage interest rates pushed more buyers to close deals.”
On top of this, data on the homebuilding front is, for the most part, similarly upbeat.
Earlier this year, the CEO of PulteGroup , the nation’s second largest homebuilder by volume (click here to see a graphic of the top five), noted that “[i]n a number of communities across the country, demand has been so strong that we have taken action to slow the overall pace of sales.”
Addressing interest rates specifically, he said in the second-quarter earnings release that “[e]ven the recent rise in interest rates has had little effect on overall activity, as consumers continue to perceive good values, amid limited supply and generally rising sales prices, combined with the reality of high lease rates in the rental market.”
The head of Lennar , the third largest builder, chimed in as well, noting that “there are too few dwellings for a growing population and for normalized household formation.” Not coincidentally, Lennar’s second-quarter home deliveries jumped by 39% over to the same period last year.
Whether higher mortgage rates are going to help or hurt home sales simply isn’t answerable right now. Despite the evidence that they’re doing the former, I can’t help believing that this relationship will reverse in the not-too-distant future.
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The article Are Higher Mortgage Rates Boosting Home Sales? Nobody Knows. originally appeared on Fool.com.
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