Sunday, September 22, 2013

Interest Rates and Home Sales

 

 (The following article is an interesting read since it demonstrates the fact that two opposite conclusions are arrived at from looking at the same data)

Are Higher Mortgage Rates Boosting Home Sales? Nobody Knows.

John Maxfield
September 22, 2013

Are higher mortgage rates helping or hurting home sales? That's been one of the biggest unexpected conundrums that economists have run into of late, as there's data to support both conclusions.
Just so we're all on the same page, let's review what's happened to mortgage rates over the past few months.
We started the year out at historically low levels. Weekly data collected by Freddie Mac shows that the average rate on a 30-year fixed rate mortgage oscillated around 3.5% for much of the first half of the year, even dipping below 3.4% on two occasions.
All this changed, however, in May, as investors convinced themselves that the Federal Reserve would reduce its support for the economy and thereby drive long-term borrowing costs higher. Needless to say, it was a self-fulfilling prophecy.
In the months that followed, the cost of a home loan shot up by more than 100 basis points, ultimately settling in around 4.5%.
Looking at that chart, one would be excused for thinking that the housing market must be suffering. Like anything else, mortgage volumes are a function of supply and demand. And demand is a function of price -- that is, the interest rate. As the price goes up, demand goes down.
This is exactly what we've seen.
Since the beginning of May, purchase-money mortgage applications are down by 16%, says the Mortgage Bankers Association. And many of the nation's largest mortgage lenders are forecasting even sharper declines for overall mortgage activity.
At a recent industry conference, Timothy Sloan, the chief financial officer of Wells Fargo (NYSE: WFC), predicted that the bank's home loan volumes would drop to $80 billion in the third quarter. That's off the more than $100 billion that it's originated for each of the past seven quarters.
Sloan's counterpart at JPMorgan Chase (NYSE: JPM) made things sound even worse. "In the second quarter, we told you that if rates remained at these levels, we would expect volumes to be reduced by 30% to 40% in the second half of this year versus the first half on the back of a dramatic reduction in refinance volume," CFO Marianne Lake said.
"This is indeed ... what we're experiencing, and all of Fannie, Freddie, and the [Mortgage Bankers Association] agree that the volume reduction will be 35% flat."
But here's where it gets interesting.
The underlying data from the housing market itself appears to be accelerating in the face of these headwinds. Just last week, the National Association of Realtors released its estimate of existing-home sales for the month of August.
How do you think they fared?
Even though July witnessed a 6.5% sequential surge in sales of previously owned homes, they continued to climb in August. On a year-over-year basis, they were up by more than 13%, coming in at the highest level in six and a half years.
The reason? According to the trade group's chief economist, Lawrence Yun, "Rising mortgage interest rates pushed more buyers to close deals."
On top of this, data on the homebuilding front is, for the most part, similarly upbeat.
Earlier this year, the CEO of PulteGroup (NYSE: PHM), the nation's second largest homebuilder by volume (click here to see a graphic of the top five), noted that "[i]n a number of communities across the country, demand has been so strong that we have taken action to slow the overall pace of sales."
Addressing interest rates specifically, he said in the second-quarter earnings release that "[e]ven the recent rise in interest rates has had little effect on overall activity, as consumers continue to perceive good values, amid limited supply and generally rising sales prices, combined with the reality of high lease rates in the rental market."
The head of Lennar (NYSE: LEN), the third largest builder, chimed in as well, noting that "there are too few dwellings for a growing population and for normalized household formation." Not coincidentally, Lennar's second-quarter home deliveries jumped by 39% over to the same period last year.
Whether higher mortgage rates are going to help or hurt home sales simply isn't answerable right now. Despite the evidence that they're doing the former, I can't help believing that this relationship will reverse in the not-too-distant future.

16 comments:

Tiffany Pabon said...

This article illustrates a good argument. I can understand why both sides view the rise in mortgage interest rates as hurtful or helpful. I believe that the rise in interest rates is a force pushing consumers to purchase homes sooner rather than wait to purchase later. People don’t want to pay higher rates so they rather get a fixed mortgage now than have to settle for a higher prices mortgage in the future. I believe that since the economy is starting to pick up even if it isn't as fast paced as we would like the prices need to rise in order for our economy to become balanced. The interest rates a few months ago made history due to the lowest rates ever made available to home owners. Those changes which lowered the interest rates were with the purpose to encourage the purchases of homes to ensure that the home market wouldn't plunge. The rise in mortgage interest rates is a good thing in my opinion and a sign that things are looking up for the economy.

Anthony Rocco said...

After reading this first part of this article, i was convinced the increasing price of mortgages would lead to less sales of homes. But once I saw the evidence displayed by the graphs, I am shocked.I thought for sure the increasing rate would decrease house sales. But the article said the the increasing mortgage rates were forcing people to get deals done, which I can see happening. The housing market can be very competive at times and people will be competeing against other buyers in the market so they will feel like they will be pressed for time incase another person makes an offer. If this increasing trend continues, it will only help the economy which is a very good thing.

Colby Stover said...

After reading this article, I was surprised to hear about the growth of home-sales. I was surprised to read that home-sales grew by 6.5% on a seasonally adjusted annual basis. It is also stated that there is a rise in interest rates because demand is a function of price; as price increases, demand decreases. This drives interest rates up because less people are buying homes due to the increase in price. I was also surprised to find out that increasing rates has led to increasing home sales. The economy is slowly starting to build back up but it is clear that it will take time to grow.

Mary O'Shea said...

This article informs the readers on how mortgage rates both benefit and harm society. I could not believe after reading this article the amount that mortgage rates have increased in this year alone. For the first half of the year they were right around 3.4%. However, come the second half of the year they increased to 4.5%. After reading this, I automatically assumed that this would therefore mean that the housing market would be effected as I believed that this increasing mortgage rate would deter people from buying houses. However, the article showed me how incorrect I was. Home sales increased by 6.8%!I was astounded at this piece of information, and filled with a new kind of hope that the housing market may be getting back on its feet again.

Alexa Piccoli said...

Mortgage rates, in the beginning of the year were at an all-time low but have now increased tremendously over a short six month period. Economists want to know if this will help or hurt this industry, but the data is suggesting that it may do both. Since the mortgage rates rapid increase, one would assume that home sales would go down, but since this sales have not decreased but they have been increased. Home owners are rushing to finalize sales which is increasing the amount of sales happening and pushing the market forward. This is good to see because the housing market has been down ever since the recession. Since the market is still growing even with the increased mortgage rates there is hope for more growth in the future. This is an interesting article due to the view at which you look at the data can lead to different views.

Ashleen Ulysse said...

This was an interesting article to me. I really had no idea about interest rates in homes fluctuating and rising so high! The arguments made are very understandable and the question of "is the rising rates boosting sale" is a point we should really keep looking into.I would think the rising rates would decrease sales but that is contrary to the facts shown in the data charts. I that studies should continue to be done in order to bring our economy closer to equilibrium.

Christina Sassone said...

This article was very interesting to read. I got an idea of how interest rates could be both hurtful or harmful. I was amazed how more people bought houses even after the interest rate increased. In an ideal situation this would be reverse. As the interest rate goes up the demand for the product decreases. I do not agree that this will happen every time the rates increase the sales increase. There is a certain price that people have a limit on what they are willing to spend on that particular product. Why did the increase in rate increase home sales is still a question economists should keep in mind. I believe the economy is getting better with the financial aspects of society. But whenever there is a boom in the economy, there is always a bust.

Nicholas Beato said...

I agree with the idea that people believe if Federal Reserve would reduce its support for the economy and thereby drive long-term borrowing costs higher. In the article the graph about the average 30-year fixed rate mortgage looks like the economy must be struggling in the housing market. Its not looking too good for the economy if huge officers such as Timothy Sloan of Wells Fargo and the CFO of JPMorgan Chase, Marianne Lake cant even predict loan volumes. Its interesting to know that a chief economist Lawrence Yun stated that "rising mortgage interest rates pushed more buyers to close deals." Based on reading the article I believe if higher mortgage rates will help the sale of homes in the future.

Kristoff Kolodko said...

After reading this article i was very surprised how mortgage rates were increasing while home sales was also increasing. Economics has always said as the price goes up, demand goes down, but i guess not in this case. I think that because mortgage rates looking like that are slowly increasing that people seem concerned that they might be even higher the next month causing them to buy buy houses now instead of waiting.

Kenneth Reilly said...

After reading this article, I am convinced that the housing market is finally beginning to look up. The supply and demand aspect of the housing market made banks believe that the home loan value would drop substantially after mortgage applications went down 16%. They predicted the exact opposite of what actually happened when sales increased by 6.5%! The increase in mortgage prices actually encouraged home buyers to close deals and buyers believe they are finding good deals among scarcity in housing. Whether or not this ultimately benefits the economy or not will be determined in the near future. I believe that this may not benefit the economy because new buyers coming in the market may not be encouraged to buy because of such high rates but the data is showing otherwise so I could be wrong.

Matthew Ramos said...

The housing market has rebounded profoundly following its record lows over the past year. Demand has increased substantially, and due to these increases, homes have become more expensive. On a positive note, more homes are selling which means there is a higher demand for labor, and jobs are being created. Whenever the housing market experiences success, investors get involved, and as a result mortgage rates have risen. The article displays statistics that show that the rise in rates has been inelastic, and demand has remained consistent. However, I am sure that many middle class Americans that were preparing to buy homes now can’t afford to purchase them because of the increase in mortgage rates. It is nice to see some economic stimulation for a change, and I believe that the job market will benefit tremendously. Unfortunately, history shows us that the housing market has its peaks and valleys, and right now the market is on one of those peaks. In my opinion, I don’t believe that the housing market will be able to sustain this level of growth in the long term with mortgage rates as high as they are. The demand is high now, so therefore rates continue to increase, but as time progresses I believe that the sales of homes will reach a plateau, and to prevent the market from slipping again, mortgage rates will have to decline.

Jennifer Palladino said...

The data shown in the blog post shows that mortgage rates in the beginning of the year were at an all-time low but have now increased over a short period. The data shows that this seems to be helping and hurting the economy. You would assume that the sales would be going down, but they are not. Surprisingly, sales have been increasing. This is all good news, considering the fact that housing sales have been down previously, but they finally seem to be picking up, despite increased mortgage rates.

Maria Biondi said...

This article makes a great point that higher mortgage rates would hurt selling homes but the article provides data that shows otherwise. I found it interesting that mortgage rates clearly falling under the category of supply and demand that as the price goes up for interest rates the demand goes down. Yet, JPMorgan Chase said that if rates continued to go up they expected it to reduce sales but in the year home sales were up by 13%. Although many would think that higher interest rates would decrease sales this article shockingly proves that wrong.

Matthew Corrie said...

This article brings up the interesting point of although mortgage rates are increasing, home sales are also increasing. Most would assume that the opposite would occur, however statistical charts have proved that theory wrong. With housing sales down recently it is quite surprising that the home loans have increased and home sales have also increased. Due to the rule of demand and supply, it states that as if supply is increased, demand is supposed to decrease, when in fact, demand increases with supply which makes this article really interesting.

Rich Gordon said...

The real estate market has been in a hole for the past 6 or seven years. Consumers stopped buying homes due to bad loans and mortgage problems. Within the past 6 to 8 months the market has improved substantially. This is because of lowered interest rates on mortgage loans. With this, people can take a mortgage at a low fixed rate and save money in the long run. As prices increase, demand decreases. Although the price is increasing the economy seems to continuously improve. Personally, this is a great thing for our economy and the raise in interest will stabilize the market.

Kenneth Belle said...

The fact that they increased the mortgage rate after the fact that we just got out of a recession. I would have thought both things would have decreased due to the matter of people not having the income to even buy these homes because of the mass amount of lost jobs. But seeing that they are raising is very surprising, But the fact that mortgage rates rising would cause house sales to rise is still very "iffy" at most. Because how would the prices on thing raising going to make people want to buy it more.