There is rising optimism that housing data due out later this week will indicate strengthening momentum in that key sector, growth that could bode well for the broader economy in the second quarter.
A report on March existing homes sales is out Wednesday followed on Thursday by a report on last month’s new homes sales as well a gauge of home prices by the Federal Housing Finance Agency.
Despite mortgage rates at their lowest levels in decades, the housing sector has lagged behind other key sectors such as labor and manufacturing as the U.S. economy has struggled in fits and starts to distance itself from the 2008 financial crisis.
Analysts believe that story may be poised for a turnaround.
“Hope for a housing rebound could be bolstered this week by data on existing home sales, due out Wednesday, which should show a solid recovery from recent weakness and further gains in FHFA Home Prices,” said David Kelly, chief global strategist at J.P. Morgan Funds.
Kelly said Thursday’s new home sales figures could slip a bit from their “elevated numbers” earlier in the year. However, “a chronic lack of inventory combined with still very affordable mortgage rates and steadily-improving consumer credit-worthiness should allow housing to make a better contribution to growth going forward than the rather soft advances of recent quarters,” he said.
Housing’s Significant Impact
After showing signs of a revival during periodic spurts last year, the housing sector lost steam in the second half as mortgage rates ticked higher and inventories tightened.
Housing impacts the broad economic landscape because of its significant impact on lending, construction and retail sales through purchases of building goods, furniture and home improvement items. Demand in those areas in turn impacts the labor market.
Existing home sales likely rose to a 5.03-million annualized rate, according to analysts at IHS Global Insight forecast. The lift is expected because contract signings rose for two consecutive months, which should translate into higher sales figures in March.
Meanwhile, new home sales likely “suffered a downward correction” in March, the IHS analysts said, as building permits failed to catch up to four consecutive gains in new home sales.
Positive housing data would turn the tables on last week’s disappointing figures when figures revealed that March housing starts rose far less than expected. The weak housing starts figures were attributed primarily to another rough winter that cut into overall U.S. economic growth.
One reason housing figures are likely to move higher is that many potential homebuyers can be expected to rush to make deals ahead of the Federal Reserve’s decision to raise interest rates.
Fed officials have been cagey (to say the least) about the timing of a rate hike, but most analysts believe it could be announced as early the Fed’s June meeting. When rates do start moving higher it will impact the cost of borrowing on a range of big ticket items, everything from homes to automobiles to washers and dryers.
Laxer Lending Standards
Another factor that could impact home sales in the second quarter is relaxed loan standards approved by housing finance giants Fannie Mae and Freddie Mac.
Late last year Fannie and Freddie announced details of a controversial plan to allow some first-time homeowners to obtain a mortgage while putting down just 3% of the price of the home.
The shift back toward low down payments has drawn criticism from some lawmakers as well as lending and housing experts who say the plan revives the same lax lending practices that led to the 2008 financial crisis.
However, Fannie Mae has countered that the loans that allow for 3% down payments will be held to the same eligibility requirements as other Fannie loans, including underwriting, income documentation and risk management standards. In addition, Fannie said the loans will require mortgage insurance “or other risk sharing,” the same as Fannie loans that require a 20% down payment.
In any case, many housing experts have argued for years that a primary reason the housing market has lagged behind the rest of the recovery is that lenders became too strict following the disaster of 2008. These critics have argued that many credit-worthy potential homeowners have been shut out of the market because banks allowed the pendulum to swing too far in the direction of caution.