Housing Market Hits Awkward Teenager Growth Spurt

TheStreet.com

NEW YORK (MainStreet)—The number of prospective home buyers signing contracts soared last month with home sales reaching its highest level in more than six years -- signaling rising home prices and a road to recovery for the U.S. housing market.

The Pending Home Sales Index, a forward-looking indicator for contract signing from the National Association of Realtors, rose 6.7% in May from April, and is now up 12.1% from last year. Pent-up demand, a shortage of inventory and recent increases in mortgage interest rates are fueling the rise in home sales.

"Even with limited choices, it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher," said Lawrence Yun, chief economist at the National Association of Realtors. "This implies a continuation of double-digit price increases from a year earlier, with a strong push from pent-up demand."

Yun expects the national median existing-home price to rise more than 10% to nearly $195,000 - the strongest gain since 2005.

Higher interests are pushing prospective buyers to take the leap to purchase a single-family home.

The average rate on the 30-year fixed mortgage leapt to 4.46% from 3.93% this week in response to the Federal Reserve's comment to taper off its bond-buying stimulus campaign. A 30-year fixed mortgage rate from national mortgage lender Freddie Mac spiked from 3.54% in the first week of April to 4.46% at the end of June - an increase of over one full percentage point.

"The current increase in sales might be a little bit of a spike because it makes a different to go from 3.9% to 4.5% in one week," said Svenja Gudell, senior economist at Seattle-based Zillow.com.

The housing market is still prone to sharp sudden rates of growth, said Jed Kolko, chief economist at Trulia.

"The awkward teenager is in a stage of a growth spurt where we're seeing a sharp increase in growth and at the same time the housing market is expected to start walking on its own two feet," Kolko said. "It's much like a teenager who is about to lose his allowance and even the suggestion has causes [interest] rates to rise."

Home values are appreciating in areas previously hit hard by the housing market downturn in places, such as California, Arizona, Nevada and Florida. Pending sales are highest in the West where homes sales increased the most. The annual appreciation of home values soured in the Southwest - increasing in Phoenix, Ariz. by 21% and in Las Vegas, Nev. by 28%, Gudell said.

The index remained unchanged in the Northeast in May month-to-month, but was 14.3% above a year ago. In the Midwest, sales jumped 10.2% monthly - a 22.2% increase from May 2012. Pending home sales rose 2.8% in the South - a 12.3% gain from last year. The index in the West rose 16% monthly, but is just 1.1% higher than a year ago because of limited inventory.

"We're at the normal rate and what you see here is the overcorrection," said Walt Molony, a spokesperson for the D.C. based realtors association on the increasing values of homes in the West.

The strongest home values increased in areas such San Francisco and other cites in California where inventory remains tight, Gudell said.

"Part of it is there is renewed confidence in the housing market, said Ryan Severino, senior economist at Reis, Inc. "You're starting see recovery prices and it come from the parts of the country where we saw the most pain."

In a separate report earlier this week, existing home prices in 20 U.S. metropolitan areas were 12.1% higher in April than a year earlier, according to the Standard & Poor's Case-Shiller national index.

"Home prices are correcting themselves in the market and we're seeing that in Florida, Nevada, Arizona and California." Severino said. "Also, markets in Houston, San Francisco and the Seattle-area are growing and it's not in a uniform distribution - it's a metro to metro phenomenon."

--Written by Farran Powell for MainStreet

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