The state of the U.S. housing sector has been anything but predictable in 2014. Previously, mortgage rates were expected to exceed five percent. However, we have seen a regression in recent weeks. Instead of skyrocketing as predicted, rates are once again nearing all-time lows. Moreover, the rate in which home prices were appreciating appears to be easing. Home values are not increasing as drastically as they were heading into the second half of 2014. Fortunately, there is a renewed sense of momentum, as contracts to purchase previously owned homes rose more than forecasted in July.
According to the National Association of Realtors (NAR), the pending home sales index gained 3.3 percent after a 1.3 percent decrease in June that was larger than initially anticipated. The 3.3 percent gain in previously owned home sales is particularly encouraging, as many experts only predicted a 0.5 percent increase. The strong showing of buyers will certainly help the market as we head into the typically slower fall and winter months.
The increase of pending, existing home sales may be attributed to several factors, but experts have acknowledged it is likely due in large part to a pickup in hiring rates, rising property values and historically low interest rates. As a result, construction companies have begun to break more ground on new lots and home sales have increased. Combine these factors with faster wage growth and easier access to credit, and it would appear the housing sector is finally gaining the momentum it needs to sustain a recovery.
“Housing is on a gradual glide path of improvement,” Gennadiy Goldberg, TD Securities USA LLC, said before the report. “If you had more wage growth people would be more inclined to buy homes.”
While the recovery still has a long way to go, recent progression is encouraging. Jobless claims have been reduced to their lowest level since 2007 and the economy has demonstrated an increased propensity for expansion – at least more than originally anticipated. Gross domestic product grew at a 4.2 percent pace in the second quarter, the Commerce Department reported. Accordingly, claims (INJCJC) for unemployment benefits dipped to 298,000 last week. Again, these are all encouraging signs for the future of the housing sector.
In regards to housing, purchase contracts experienced a 2.7 percent decrease in the last 12 months. According to the NAR, that is in lieu of a 4.7 percent annual decline in June that was bigger than previously estimated. Subsequently, July represented the 10th consecutive month of year-over-year declines.
On a seasonally adjusted basis, the pending sales index we mentioned earlier was 105.9. To clarify, a reading of 100 represents the average level of contract activity in 2001, or “historically healthy” home buying traffic.
Three out of four regions experienced a rise in pending sales:
- Northeast (+6.2%)
- South (+4.2%)
- West (+4%)
The only area that saw a decline in purchase contracts was the Midwest, as pending sales dropped 0.4 percent.
“Steady job additions to the economy are helping family finances and giving them added confidence to enter the market,” NAR chief economist Lawrence Yun said in a statement.
While purchase contracts do not necessarily represent a closed deal, they are a critical indicator. It isn’t till a month or two later that deals typically close and experts are able to tabulate existing-home sales. Those re-sales picked up last month, increasing to a 5.15 million pace, the best showing since September, according to data from the NAR. Construction also rebounded, with starts climbing 15.7 percent to a 1.09 million annualized rate.
While the recent news is encouraging, expectations need to be tempered. Contracts on new homes fell unexpectedly in July to an annualized pace of 412,000. According tot the Commerce Department, that is the weakest showing of new home contract signings since March.
“The biggest difficulty they have right now is obviously low inventory,” Kelly said on an Aug. 13 earnings call. “Despite the fact it’s starting to grow again, what we see within those inventory levels is there’s still a lot of homes that, I hate to say, are undesirable. And so when you take those out, it makes the inventory even tighter.”