New U.S. single-family home sales rose more than expected in November and consumer sentiment hovered near a 13-year high this month, strengthening the view that the economy will gain further momentum next year.
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President-elect Donald Trump's plan to cut taxes and increase infrastructure spending is expected to boost economic growth, though it already has sparked a surge in mortgage rates that could hurt the housing market in the long term.
"Home buyers are confident in their futures and this means the outlook is likely to be brighter next year than we thought," said Chris Rupkey, chief economist at MUFG Union Bank in New York.
The Commerce Department on Friday said new home sales increased 5.2 percent to a seasonally adjusted annual rate of 592,000 units last month. That was the second highest pace since 2007. Economists had forecast single-family home sales, which account for about 9.5 percent of overall home sales, rising 2.1 percent to a 575,000-unit rate last month.
Sales rose 16.5 percent from a year ago, boosted by a 43.8 percent jump in the Midwest to a nine-year high. Sales surged 7.7 percent in the West, their highest level since January 2008, but fell 3.1 percent in the South. They were unchanged in the Northeast.
Separately, the University of Michigan said its consumer sentiment index edged up to a reading of 98.2 from 98 earlier this month. That was the highest reading since January 2004.
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The University of Michigan said a record 18 percent of respondents "spontaneously mentioned the expected favorable impact of Trump's policies on the economy." Consumers anticipated that a stronger economy would create more jobs, with the share expecting higher income rising to a one-year high.
"Greater income growth prospects for consumers serves as a good leading indicator of real spending activity," said Michael Brown, an economist at Wells Fargo in Charlotte, North Carolina.
U.S. financial markets were little moved by the upbeat data in light pre-holiday trading. The U.S. dollar <.DXY> was steady against a basket of currencies, while prices of U.S. Treasuries rose. Stocks on Wall Street were little changed.
RISING MORTGAGE RATES
While Trump's envisaged policies have boosted confidence among households and businesses, his agenda to increase spending is expected to stoke inflation. Mortgage rates have risen rapidly since the business mogul's Nov. 8 election victory.
The interest rate on a fixed 30-year mortgage has increased more than 70 basis points to an average of 4.30 percent, the highest level since April 2014, according to data from mortgage finance firm Freddie Mac.
Mortgage rates are likely to rise further after the Federal Reserve raised its benchmark overnight interest rate last week by 25 basis points to a range of 0.50 percent to 0.75 percent. The U.S. central bank forecast three rate hikes for next year.
Higher mortgage rates in the near term could boost home sales by luring in buyers who fear further increases in borrowing costs. A report on Wednesday showed sales of previously owned homes rose to near a 10-year high in November.
"We have yet to see any clear signs in the housing data reported to date that higher rates have depressed activity," said Daniel Silver, an economist at JPMorgan in New York. "That said, we think that at some point higher rates will weigh at least somewhat on the housing market."
Higher borrowing costs come at a time when house price increases are outstripping wage gains, which could make purchases unaffordable for many first-time buyers.
Despite the rise in sales last month, the inventory of new homes on the market increased 1.6 percent to 250,000 units, the highest level since September 2009. Still, the supply of new houses for sale remains about half of what it was at the peak of the housing market boom.
The inventory rise, if sustained, could slow the pace of house price increases. At November's sales pace it would take 5.1 months to clear the supply of houses on the market, down from 5.2 months in October. A six-month supply is viewed as a healthy balance between supply and demand.
(Reporting by Lucia Mutikani; Editing by Paul Simao)