Both new home sales and existing home sales for June were surprisingly strong, according to data released last week by the National Association of Realtors (NAR). Analysts said that the figures suggest that while housing demand may moderate somewhat from the record levels witnessed recently, the market will likely stay robust, at least in the near term.
Existing home sales rose even more in June from May's record levels, coming in at 6.95 million units, rising 2% from May's revised number. Steve Stanley, chief economist from RBS Greenwich Capital, said this probably reflects the explosion in activity witnessed in the spring when mortgage rates first begun to back up. He noted that existing home sales are recorded at contract closing and therefore tend to lag mortgage applications and new home sales by up to two months.
"We think that housing demand is in the process of moderating after a burst of activity in the spring, when potential buyers (and sellers) jumped in to get ahead of rising rates," Stanley wrote. The presumption is that it would require a 7-handle 30-year fixed mortgage rate for home sales to dampen. With current rate levels, "home sales should pull back somewhat but remain historically vigorous," he stated.
"Bizarrely, some have interpreted the 2% rise in existing home sales as implying a decline in the rate of turnover because June has two more business days than May," said JPMorgan Securities.
On the contrary, analysts from the firm interpret the data as indicating "exceptional strength" in the housing market. "It is somewhat surprising that the historical seasonal patterns (accelerating in June) were fully realized in the record housing market," said analysts. They noted that the raw existing home sales data for June was the highest ever by a considerable margin, 17% higher compared with the previous record experienced in May.
In contrast to JPMorgan, UBS said that the most current existing home sales data imply slower turnover rates. Analysts said since day-count alone - which is over and above the seasonal correction applied by the NAR - suggested a 5.1% increase, the underlying turnover (defined as the daily rate of home sales) actually dropped by 3%.
"Mortgage rates have risen 75 basis points over the past four months - suggesting a substantial decline in existing home sales over the next three months," wrote analysts. "Day-count implies a 2% decline in unadjusted home sales next month (July) and higher rates imply additional declines." The firm's data illustrates how current mortgage rates point to weaker home sales over the next few months, decreasing to a day-count-adjusted range of roughly 6 million to 6.3 million units per year.
However, this projection only takes into account higher mortgage rates, and not a fundamental slowdown in home-price growth. Though analysts expect home-price appreciation to slow, this is probably a longer-term trend. UBS also noted that a reduction in existing homes sales to 6.3 million units per year is approximately equivalent to 0.5 CPR. This decrease should come with slowdowns resulting from diminishing out-of-the-money refinancings, analysts said.
New home sales
New home sales have gone down slightly from a record high seen last month but remained above various economists' estimates. The NAR reported that single-family new home sales dipped to 1.326 million in June, decreasing 0.8% from the revised number the previous month.
"Going forward, housing demand may moderate from the unsustainably high levels seen in the spring and early summer when fence-sitters' jumped in the market in anticipation of rising mortgage rates," said Michelle Girard, senior economist from RBS Greenwich. "However, the level of activity is likely to remain vigorous." Girard added that though applications for new home sales have lessened in June and early July, solid job and income growth could lessen the damage resulting from increased borrowing costs. It will take considerably higher rates - nearer the 7% level for fixed-rates - to stop activity in the housing sector, Girard said.
Meanwhile, despite rising interest rates, the NAR is still expecting both existing home sales and new home sales to set records this year. In terms of existing home sales, the projection is for 6.31 million units for 2004, up 3.4% from last year. Meanwhile, new home sales are expected to rise to 1.16 million units, increasing 6.4% from last year. NAR representatives said the housing numbers are being driven by demand - this is expected to remain a driver for the next 10 years - from a new generation of homeowners, including children of baby boomers. NAR is expecting the housing market to slow down sometime during the second half of the year but not in the near term.
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