U.S. Markets close in 2 hrs 34 mins

Housing Cools But Recovery Still Intact

Rising interest rates are slowing but not derailing the housing recovery, two key reports indicated Wednesday.

The pending home sales index, which tracks existing-home contract signings, fell 1.3% in July, the second down month in a row, the National Association of Realtors said.

However, loan applications for buying a home rose for a second straight week, the Mortgage Bankers Association said, suggesting some stabilization after hitting a six-month low. Overall mortgage applications fell 2.5% to the lowest in over two years.

The news follows last week's report that July new-home sales fell sharply to a nine-month low.

"The reality is that the rise in interest rates in late spring and early summer is starting to have some impact on home sales," said Keith Gumbinger, vice president of mortgage research firm HSH.com.

Overall mortgage applications have plunged 53% since May 3, about when rates began to rise. Applications to refinance have dived 64.1% in that time. Purchase applications are off 14.1%.

Borrowing costs have spiked in the last few months as markets expect the Federal Reserve to start reducing its bond-buying program — perhaps at its September policy meeting. The 30-year fixed mortgage rate, 3.59% in the week ended May 9, soared to 4.8% last week, the highest since April 2011, according to the MBA.

Rates will continue to buffet the market for some time. CalculatedRiskBlog.com's Bill McBride believes many people rushed to close in July to take advantage of locked-in lower rates. That would mean pending home sales will show a decline in August.

The Case-Shiller 20-city home price index for June, released Tuesday, showed that the pace of that growth is slowing, Gumbinger pointed out. "This is an indication that future demand is starting to cool," he said.

Despite recent choppiness, there's still a great deal of buyer demand in the market, McBride said. And even though purchase applications have fallen as rates have risen, they're still up 6% over a year ago, he pointed out.

Likewise, pending home sales are 6.7% above a year earlier.

The Fed is likely to take the softer housing data in stride. "I don't think what we've seen so far is enough to derail them from a ta pering process," Gumbinger said, "but it may mean the tapering process is slower and more protracted than it might have been.

But he and McBride note that the Fed is more focused on employment as an indicator of the health of the economy.

"Are we running from something that was running hot to something that's more sustainable? I think so," Gumbinger said.