WE’RE HEARING the housing market is supposed to be on a tear. Prices are rising. Existing home sales are hitting multiyear highs. Demand for new homes is growing. Major builders have backlogs of orders that get larger every quarter.
But then Friday comes along and the Census Bureau reports that new home sales dropped 13% in July. In addition, sales in the previous three months were revised downward. What the hell happened?
While news from the housing front has generally been good, rising interest rates due to the Federal Reserve’s tap dance toward tapering is not helping.
The Census Bureau tracks the signing of purchase contracts, not actual sales and closings. And the July report indicates that cancelations could have been rising in step with rates.
At the Fed’s monetary policy meeting at the end of July, Fed officials acknowledged that the higher rates could “restrain housing activity.” But they expect the housing sector will be “resilient” due to pent-up housing demand, the “banks increasing willingness to make mortgage loans” and other encouraging factors.
However, they realize refinancings have dropped off a cliff. And they intend to “watch carefully for signs of a greater-than-anticipated effect of higher mortgage rates on housing activity,” according to the FOMC minutes released last week.
Some believe the July new home sales report is a fluke. They note that one month’s data do not make a trend and the figures are regularly revised.
But home sales were down in every region. But it could reflect that buyers are taking a “pause” to see where mortgage rates will settle, according to the David Crowe, chief economist of the National Association of Home Builders.
Crowe expects mortgage rates will be more stable going forward. And future increases will “reflect general economic improvement as opposed to second guessing what the Fed’s doing.”
The NAHB economist expects the August sales report will be better.
IHS Global Insight economist Patrick Newport noted that banks are not providing local builders and developers with enough credit for building lots and financing new construction.
“Only 36,000 new completed homes were listed for sale at the end of July,” Newport said. And inventories remain lean. “A three-month moving average of new home sale shows a loss of momentum nationally and in all four regions,” the Global Insight economist said.
Meanwhile, Wells Fargo Securities senior economist Mark Vitner wants to blame the July dip on the weather—some regions have suffered two months of extremely rainy weather. And he blames it on the shortage of newly completed homes.
The small builders complain about a shortage of labor and credit while the major builders are “metering” their sales to benefit from rising prices.
“It may be the combination of low inventory and rainy weather has led to fewer sales in July,” Vitner told NMN. “I can’t believe that rates at current levels would be a killer for the housing market.”
Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.