Rising housing rates obstacle to rebound
After a roller-coaster decade of boom-bust-boom, the U.S. housing market is going downhill just when many economists thought annual sales would be heading up.
Sales of previously owned properties in March tumbled 7.5 percent from a year earlier to the slowest pace in 20 months, while purchases of new houses sank 14.5 percent from February, according to reports this week. Mortgage applications to buy homes plunged 19 percent from a year earlier, indicating slowing demand during what is typically the busiest season for deals.
The housing market’s underlying fragility is emerging as outside influences that fueled a two-year rebound are receding. Mortgage interest rates are rising from record lows as the central bank withdraws its stimulus, and investors, who had helped drive national prices up more than 20 percent as they went on a buying spree, are now retreating.
“The very low rate environment and the high level of investment activities really masked how weak the housing market was,” Sam Khater, deputy chief economist at Irvine, Calif.-based CoreLogic Inc., said in a telephone interview. “Once it goes back to the normal owner-occupied purchase market, you really realize how weak the market is.”
While last year’s spring buying season was characterized by bidding wars across the country as buyers rushed to take advantage of record-low mortgage rates amid low inventory, the market so far in 2014 has been more affected by issues specific to local geographic areas.
Sales are slipping in Phoenix and Las Vegas, where traditional buyers aren’t stepping in to fill the void left by investors. In San Francisco, Denver and Dallas, where job growth is robust, listings are scarce and overpriced for many house hunters.
“We’ve had a boom and we’ve had a bust, and those were all national events,” said Mark Palim, vice president for applied economics and housing research at Fannie Mae in Washington. “Now that national drivers are less significant to the market, you’re seeing the re-emergence of local economic factors.”
Buyers, already handicapped by tight credit and weak wage growth, felt the hit to their purchasing power when mortgage rates jumped last year. The average rate for a 30-year fixed mortgage was 4.33 percent this week, according to Freddie Mac, up a full percentage point from near record lows last May as the Federal Reserve scales back bond purchases. That raised the cost of a $200,000 mortgage by 13 percent, with monthly payments climbing to $993 from $881.
Average mortgage down payments remain low compared with levels before the housing boom. In 2013, borrowers put down 10 percent, on average, compared with 16 percent in 2003, according to data from the National Association of Realtors. The average dipped to 8 percent in 2009 and 2010, when tax incentives were put in place to encourage purchases by first-time buyers, who more often use federally-insured loans with lower down payment requirements.
The National Association of Realtors’ Housing Affordability Index, fell 16 percent in the 12 months through February, the most recent month available.
Prices have climbed so fast in the last two years that buyers have sticker shock, said Lawrence Yun, chief economist for the National Association of Realtors.
He projects that sales will decline 2 percent this year after predicting, at the start of the year, for a small increase over 2013.
“Housing is a victim of its own success,” Yun said. “It’s just that the fast price growth is not healthy.”
Interest rates on 30-year mortgages are still about half the 8.36 percent average since 1971, according to Freddie Mac’s data. Rates on 30-year loans peaked at 18.6 percent in 1981.
Housing affordability is still 25 percent above the average since back to 1986, based on the trade group’s composite index, which measures housing costs, household income and interest rates.
“When you talk about 3 to 4 percent interest rates, that’s still lower than what most of us are used to and as much as 12 percentage points lower than what we remember at the worst of the market,” Stefan Swanepoel, editor of Swanepoel Trends Report, a real estate industry journal based in San Juan Capistrano, Calif., said in a telephone interview.
Lenders have begun to loosen credit for home purchases as they seek to hold onto business that plunged as fewer homeowners refinanced. The average FICO score for conventional purchase mortgages was 755 in March, compared with a 763 average in 2012, according to Ellie Mae Inc., a mortgage-software provider.
It’s too early to say that the market’s recovery is faltering, said Paul Diggle, a housing economist with London- based Capital Economics. Bad weather accounted for slower sales in parts of the Northeast and Midwest, he said.
“We have taken an optimistic view that as investor demand starts to drop off, we’ll see improvement in organic demand,” Diggle said. “If we don’t see anything by the middle of the year, we’ll be changing our outlook.”
One sign things aren’t all bad: D.R. Horton Inc., the largest U.S. homebuilder by revenue, Thursday reported earnings and orders that beat analyst estimates. The company is experiencing “solid demand,” Chief Executive Officer Donald Tomnitz said. The shares jumped 8.3 percent.