Falling mortgage rates lift home sales
Wednesday, June 26, 2019
Prospective homebuyers took advantage of a drop in mortgage rates in May to scoop up available inventory. Entry-level and lower-income buyers were especially eager to lock in a purchase in anticipation that lower rates will cause home prices to creep upwards again.
It was only the second time this year that sales of existing homes increased month-over-month. New home sales, on the other hand, plummeted for the second month in a row.
Mortgage rates began to decline in late April and hit their lowest point, as of that date, for the second time this year in late May, hovering just above 4%. Although rates were down just one basis point, it was enough to stimulate lender and buyer activity.
Would-be homebuyers were encouraged by the more favorable lending conditions. Fannie Mae stated its Home Purchase Sentiment Index (HPSI) returned to a near-historical high in May, up 3.7 points from April, largely due to a 13% increase in the portion of participants saying now was a good time to buy a home. Those who believe prices will go up in the future rose 5%, while those who believe mortgage rates will continue to go down increased 3%.
Those sentiments, along with an uptick in available homes for sale, brought more buyers into the market. The National Association of Realtors (NAR) announced existing home sales on the whole rebounded in May after two months of decline, up 2.5% from April. Sales of single-family homes increased around 2.5% as well.
All four regions of the country registered sales increases for the month. February is the only other month so far this year that the NAR has recorded month-over-month gains. NAR chief economist Lawrence Yun attributed the boost to falling mortgage rates.
Meanwhile, sellers of new homes continue to struggle, especially with rising costs in the face of demand for more affordability. The median price of a new home dropped from $342,200 in April to $308,000 in May, and the average price fell from $393,700 to $377,200.
The boost in mortgage applications and falling prices notwithstanding, new home sales in May tanked 7.8% month-over-month, following a 6.9% drop in April. It was the biggest decline since last October. Real estate consultant John Burns contends the industry has “run out of steam” due to regulations, market conditions and changes in lifestyle.
While the renewed buyer activity was welcome news, industry analysts voiced concerns that growing demand would reverse the downward trend of diminishing hikes in home prices. And indeed, the median price for an existing home went from $267,300 in April to $277,700 in May, up 4.3 % from the previous year.
Online real-estate brokerage firm Redfin said home prices in the 85 metro areas it tracks were up 3.6% from May 2017, the largest year-over-year increase it has recorded in seven months.
Although employment and the economy remain strong, gains in wages and household income are not keeping pace with home prices and the cost of borrowing. That means many homes simply are out of reach of would-be buyers.
Since demand is greatest for moderately priced homes, even small price increases could drag down sales in the coming months, despite lower mortgage rates. In reporting on mortgage applications for May, the MBA noted that the average loan size was down 3% from the previous month, due to a combination of lowering prices for new homes and pent-up demand for more affordable homes.
Redfin chief economist Daryl Fairweather observed that while more homeowners may be enticed by rising prices to put their homes up for sale this summer, a shortage of suitable homes for buyers, both existing and new, will likely hold back sales growth. Both the NAR and Redfin reported inventories were up in May compared to April, but are well below historic levels on a monthly supply basis.
Redfin stated that the year-over-year incremental increase in May (2.5%) was the smallest in eight months. Single-family new home starts in May tumbled 6.4% from the previous month, and completions were down 5%, adding to concerns of continuing inadequate supplies.
At present, total home sales nationally are lagging behind those at the same time last year. Existing home sales were down about a percentage point compared to May 2017, and new sales are 3.7% below the same period last year. Market challenges could make this year’s target of modest growth difficult to achieve.
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