Despite seemingly contradictory numbers reported this month, the housing market still seems to be pretty healthy.
Sales of existing homes in the U.S. have fallen to a near two-year low, while the sales of new homes are at a six-year high. Home prices have dipped slightly for the month, but for the year, they have risen higher than the rate of inflation. Mortgage rates are also at a much higher rate than one year ago.
Existing homes were sold at an annualized rate of 4.79 million units in October, down 6.6% from a September rate of 5.13 million units, according to the National Association of Realtors. However, the NAR still predicts a record year in existing home sales, topping at about 5.2 million units by the end of 1999. "This year, every month up until now, has had existing home sales running above a 5 million unit annual rate," said Robert Van Order, chief economist for Freddie Mac. "So this is still going to be a record year."
The decrease is attributed to rising interest rates, which were at an October average of 7.85%, up from 6.71% for October 1998, also signaling a strong market. "Last year we sort of got lucky, in part because the rest of the world, at least financially, was in trouble and lots of money was coming in to the U.S. and that was bidding down interest rates," said Van Order. "If rates drop that low again it will be because the economy is very week."
Despite the higher interest rates, new home sales have risen 16.3% in October, to a six-year high of an annual rate of 986,000 units, following a September plunge of 8.1%. New home sales were up in every area of the country, except the Northeast, where home sales slowed 11%. The most significant growth was in the Midwest, with a 40.4% increase.
The median prices for all homes were down slightly for October, with existing homes averaging $133,100, down from $134,400 the month before. Average new home prices dropped to $159,000 from $159,900 in September. However, over the 12-month period ending Sept. 30, the average price of homes has increased 5.9%.
The high interest rates, coupled with the home price increase, makes housing a good investment, Van Order said. "If you really expect house prices to grow at say 6%, and right now mortgage rates are at 8%. If you're a middle income buyer, that's probably 5% after taxes. And house prices are growing at 6%. So even before you get the benefits of living in it, you're making some money, and you're making about enough to pay your property taxes. The investment aspect of housing is strong, despite the fact interest rates have gone up."
Dale Westhoff, managing director of mortgage-backed securities at Bear, Stearns & Co., agrees. "It will continue to show robust numbers as long as consumer confidence is high and we see those kind of home price gains," he said. "I think to a large extent that, along with the stock market and the wealth that is created by that, the home price gains have been fueling a lot of the housing activity that we've seen as people leverage on that equity that they've built."
While this year is on pace to break records, economists indicate this may be the last one for a few years. "I think we'll see a lower level next year, and then maybe something the same after that, and then maybe starting to grow," said Van Order, indicating that sales should grow roughly in line with the population.
And because these numbers have already been factored in to secondary market pools, Westhoff said there is nothing to worry about. "We've certainly built it into our short-term prepay forecasts. Housing turnover levels are running at about 25% higher than their historical average and our projections kind of incorporate that in. So I think the numbers kind of support a continuation of that trend."