How are rising mortgage rates affecting home sales?by Keith Gumbinger
While mortgage rates have risen appreciable over the last few months and rose somewhat dramatically last week, higher mortgage rates are nothing new. In fact, in the grand scheme of things, mortgage rates are still historically low.
Nothing wrong with 5 percent rates
That said, there is nothing wrong with a 30-year fixed-rate mortgage at 5 percent or thereabouts. In fact, before the Fed began directly manipulating the mortgage market in 2008, the lowest conforming 30-year fixed-rate mortgage we “naturally” achieved was 5.24 percent back in June 2003 … a 37-year low at the time.
Of course, we are also well aware that headlines last week also told that existing home sales rose by 6.5 percent to a 5.39 million (annualized) pace.
Wait, mortgage rates are rising AND home sales are rising, too? Not exactly.
Sales of existing homes are recorded when the process is completed, and may better reflect applications and contracts placed some 45 to 60 days ago, a time when mortgage rates were lower (mid to upper 3-percent range in May, low to mid-four-percent range in June), so we are seeing a lagged effect relative to the present state of the market.
At present, supplies of used homes are holding at a 5.1 month level, while prices continued to be recorded with double-digit gains over the same period last year.
The existing-home sales report provides a strong contrast against sales of new homes, which are recorded when a contract for sale is executed, and may better reflect immediate demand conditions at the time.
In July, when mortgage rates had moved even higher than June, sales of new homes slumped by 13.4 percent. Sales for June, May and April were also diminished by a total of 70,000, while prices moved up by 4.1 percent for the month.
With the slump in sales, inventory levels moved up to a 5.2 month supply, closer to normal, with the actual number of units built and ready for sale rising to 171,000, an increase of 7,000 over June, but still historically low. With low stockpiles, builders will likely remain happy as they replenish inventories in expectation of a long-run improvement in housing as we go forward.