Housing Momentum Rising Ahead of Expected Rate Hike

An unexpectedly weak housing report released Friday is unlikely to derail momentum in the all-important sector as demand peaks ahead of interest rate hikes later this year that will eventually raise mortgage rates.

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In the long-term, higher mortgage rates will likely cut into demand, but that’s not currently a concern.

A Commerce Department report that showed new homes sales fell 6.8% in June from the prior month should be should be “taken with a grain of salt,” said analysts at IHS Global Insight. “None of the sales figures pass the test for statistical significance,” the analysts said.

Friday’s report said 482,000 new homes were sold in June, the lowest reading since November. Economists surveyed by Thomson Reuters had a target of 546,000. Also discouraging was a downward revision to May sales to 517,000 from the 546,000 originally reported.

Nevertheless, new home sales are notoriously volatile on a month-to-month basis and year-over-year figures show strong gains: June sales were up 18.1% from a year ago, and sales through the first half of 2015 are up 21.2% from the first half of 2014.

“Looking ahead, we expect new home sales will continue to strengthen and support an acceleration in housing activity,” analysts at Oxford Economics wrote in a note to clients. “Firming wage growth, rising employment, still-low mortgage rates (even as the Fed commences liftoff), slowing home price inflation, and the release of pent-up demand should support greater vigor in the housing sector.”

A strengthening job market that has seen unemployment fall to 5.3% in June, the lowest level in seven years, and wages start to rise, combined with the expectations of a rate hike later this year has increased demand across the housing sector.

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Momentum Should Continue Through the Summer

A separate report from the National Association of Realtors released Wednesday showed sales of previously owned homes, which represents the lion’s share of the overall market, climbed 3.2% in June, an eight-year high.

In addition, data last week showed building permits near an eight-year peak in June and housing starts increasing solidly.

New homes sales in the Northeast remained strong in June, rising 28% after soaring 78.6 percent in May.

The IHS analysts ticked off a laundry list of reasons why housing market momentum should continue to rise through the summer.

“The new home market is benefiting from a number of tailwinds,” the said. “First-time buyers are entering the existing home market, which helps to add current sellers to the demand for new construction. Both builders and buyers benefit from improved access to credit. According to the FDIC data, loan disbursements have been accelerating in both the land development and residential construction categories since the last quarter of 2014.”

The concern, however, is that air could come out of the sails later in the year after the Federal Reserve starts raising interest rates, possibly as soon as September. When that happens borrowing costs will move higher, notably on big ticket items such as homes and cars.

The belief is the current upward momentum in housing is being fueled by consumers who want to buy a home now and lock in a cheaper mortgage before rates move higher later this year. When rates do start moving higher, the concern is that weak housing reports will no longer be shrugged off as statistical anomalies.

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