Rising Mortgage Rates and Home Prices Reduce Home Sales

Rising mortgage rates combined with rising home prices are reducing the sales of existing homes according to the National Association of Realtors.  NAR’s pending home sales index for June declined 0.4 percent.   Additionally, the lack of home supply is also impacting home sales on all levels.

Home sale data based on region showed another strong gain of 3.3 percent for the West.  The East was essentially flat, and both the Midwest and the South showed slight declines.

The plus factor to limited housing inventory is that home prices are extending their run of strong gains.  Sale increase in May was a little softer than prior months, at 1.0 percent, which is still quite strong though.  The prior two months showed gains of 1.7 and 1.9 percent.  May's data show gains across 18 of 20 cities measured by the Case-Shiller Home Value Index.  Year-on-year, sales show a 12.1 percent gain in May which matches April's recovery high.  Home price appreciation is a major plus that's lifting consumer spirits and the economic outlook.

The approximate 1 percent increase in mortgage rates the last 3 months, which has been primarily driven by the Fed’s expected tapering of their stimulus program, seems to be having an impact on mortgage applications.  The Mortgage Bankers Association reported that for the week ending July 27^th applications for purchase mortgages declined 3% while refinance applications dropped 4%.

On Wednesday ADP reported that private payroll employment showed significant month-to-month improvement in job growth.  ADP reported a moderate increase of 188,000 for private payrolls in June versus a slightly revised and less than moderate 134,000 gain in May. On friday at 8:30AM EST the government will release the latest figures for national employment.  The consensus is that the report will show an increase of 195,000 new jobs.  The word of caution is that, lately, analyst predictions on this number have been somewhat inaccurate and overstated as recent employment figures still show the labor market recovering more slowly than we would like to see.

The latest report on first time jobless claims is that they are mostly at their lowest points of the whole recovery.  However, the results are less than convincing due to seasonal distortions tied to temporary summer layoffs in the auto industry. Initial claims fell 19,000 in the July 27 week to a recovery low of 326,000.

As far as economic growth, the second quarter GDP topped expectations, but partly due to the fact that the first quarter GDP was revised down to 1.1%.  GDP for the second quarter came in at 1.7%; however, expectations are that the government will likely revise this figure downward when they release the 3^rd quarter growth figures in October.  (I am starting to wonder what is the point of the government releasing figures that are always being revised?)

Market moving reports for next week are:

• Monday August 5^th – ISM Non-Manufacturing Index
• Wednesday August 7^th - MBA Applications
• Thursday August 8^th - First Time Jobless Claims