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A heat check for the housing market


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A heat check for the housing market

By Mark Hamrick · Bankrate.com
Monday, April 18, 2016
Posted: 8 am ET

The Washington Post/Getty Images

The bulk of this week's economic reports will put the focus right at home.

When we last checked on existing home sales, the National Association of Realtors told us they dropped by a surprisingly sharp 7.1% from January to February, though sales remained slightly above year-ago levels. One reason for constrained home sales, both new and "used," is the lack of available homes for sale. It's hard to buy a home when there are few on the market or being built.

The health of the housing market is important for a number of reasons:

  • Most financially viable adults are looking to own a home or rent.
  • A severe negative downturn in the housing market can wreak havoc on the broader economy, as we saw in the past decade.
  • We found out what it means when people become overleveraged using their home equity -- and what happens when they lose access to that equity.
The housing market has been in recovery mode since it peaked, collapsed, and created a financial crisis and recession. "There are some signs of overheating in such markets as Miami and San Francisco," says Lynn Reaser, chief economist with Point Loma Nazarene University. These markets appear to be more the exception than the rule, in contrast to the pre-recession peak. Keep in mind that bubbles are easier to spot after they burst, not before.

On tap this week
This week, we'll get a variety of reports, including metrics associated with new housing construction and sales of previously owned homes. It would be surprising and concerning if we don't see better numbers for existing and new home sales (the latter report comes the following week). The rebound in the stock market and better weather in regions that previously saw declines should help.

So much for rising interest rates
Heading in, 2016 was supposed to be the year of steady increases in interest rates from the Federal Reserve. As members of the Federal Open Market Committee hiked their benchmark rate for the first time in nearly a decade this past December, they forecast a total of 4 rate hikes in 2016. But at the most recent meeting, they backtracked, indicating only 2 rate hikes this year. And many people are skeptical whether those will happen.

Economist Reaser thinks there is risk of some surprises here. "As the Fed's target moves higher and inflation rises, long-term rates, including mortgage rates, also should rise. Movements in long-term interest rates are also likely to be much less 'gradual' than monetary policymakers might like to see."

What happens if the price of oil rises, or if the sluggish global economy gains some traction? That could add to the risk of a surprising and potentially unpleasant rise in inflation and interest rates, including those associated with mortgages.

Mortgage rates down, home prices up
As we've braced for the possibility of higher rates, those associated with mortgages have moved in the other direction. Bankrate's weekly rate survey saw the 30-year fixed fall again, down to 3.72%. The average rate was 3.79% a year ago.

In the mixed blessings department, home prices continue to edge higher. The National Association of Realtors says the median price of existing homes sold in February (the most recent month reported) was $210,800, up 4.4% from a year earlier. That's good news for sellers, but it is more costly for those looking to get in, including cash-strapped, first-time buyers. "Home prices cannot indefinitely rise faster than household incomes. Eventually home-price appreciation must slow or even stall until household incomes can catch up," says Alan MacEachin, corporate economist of Navy Federal Credit Union.

For the housing market and all kinds of other sectors, another nagging problem is the lack of substantial wage gains. People are saving more money, but they're not enjoying the kind of steady improvement in incomes they think they should be seeing by this time in the recovery, with the unemployment rate reported at 5%. As a measure of that frustration, just look to the tone of the presidential election this year.