Academic journal article ABA Banking Journal

Is the Housing Recovery Back on Track?

Academic journal article ABA Banking Journal

Is the Housing Recovery Back on Track?

Article excerpt

Investors cheered the rebound in new home sales in October, concluding that the housing recovery was back on track and home buyers had shrugged off the rapid climb in interest rates since the end of May. But the reality has been a bit more complicated.

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On the surface, the 25% jump in monthly new home sales is impressive. In one month, home sales bounced back to the June 2013 level on a seasonally adjusted basis--fully recovered from their summer swoon. But keep in mind that one month of stronger sales is not convincing evidence of a trend. A few more months of strong data is needed for a true picture of demand.

Also, don't forget that mortgage rates were generally falling in October, so those who were hit with sticker shock when rates jumped probably rushed back in to buy as soon as rates fell. Unfortunately, mortgage rates climbed again in November (see chart) as stronger economic data reinforced bond market expectations that a reduction in the Federal Reserve asset purchases program (QE3) was imminent.

Below the surface, the impact of higher rates on housing affordability is clearly being felt. The weak fall selling season significantly pushed up new home inventories. The months of supply of new homes in September stood at 6.4 months--the highest level since August 2011--and stood at the April 2012 level of 4.9 months even with the huge October jump.

New home prices are no longer rising. Median prices have dropped rapidly since April and, for the first time since June 2012, actually declined from a year earlier. As recently as April 2013, median prices were up 18% year-on-year. …

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