Rising interest rates since spring have throttled back the pace of home sales and price recovery by only a bit so far — mortgages remain cheap by historical standards.
But can the housing market's renewed vigor amid pent-up demand sustain itself? The Fed isn't betting that it necessarily could without the U.S. continuing to apply some sustained downward pressure on interest rates. And the housing market has yet to show the full effects of how far rates have already lifted.
Most housing data reports out this week raised concerns about where the housing market is headed, but still reflected strength in the sector even as the average rate for a 30-year fixed-rate mortgage has increased to 4.5%, from around 3.3% as recently as May.
Rising mortgage interest rates "pushed more buyers to close deals," said the National Association of Realtors' chief economist, Lawrence Yun, in the group's report on existing-home sales Thursday. But with rates impacting affordability and other factors at play, he says, the housing market might be experiencing a temporary peak.
"Monthly sales are likely to be uneven in the months ahead from several market frictions," Yun wrote.
Mortgage rates might not push much higher in the near term, due to the decision Wednesday by the Federal Reserve's Open Market Committee to keep spending about $85 billion a month on asset purchases rather than tapering them. That surprised economists, who expected the Fed to curb its buying and pave the way for higher rates.
Describing the policy decision to not taper as a precautionary wait-and-see approach, Fed Chairman Ben Bernanke said Wednesday: "We are somewhat concerned. I won't overstate it, but we do want to see the effects of higher interest rates on the economy, particularly in mortgage rates on housing.
Even with the Fed tarrying on tapering, most industry analysts expect the U.S. housing market to feel a pinch from rates that are much higher than they were a few months ago.
At the same time, they say, the blow should be softened by strength in other areas, including an improving economy and higher home prices.
"What usually happens when rates rise is that lots of other factors are changing at the same time," said Jed Kolko, chief economist at Trulia (TRLA), a real estate website.
When mortgage rates rise, Kolko says, the economy usually strengthens. And a stronger economy helps offset the impact of higher rates.
"Also, rising home prices have encouraged more people to put their homes on the market. When that happens, sales increase," he said.
One thing pretty much everyone agrees on is that higher rates aren't doing the housing market any favors. Already, some sales growth figures have softened, at least compared with the robust numbers recorded a few months ago.
"We had pretty explosive growth in April and May, and rising interest rates have sobered that up a little bit. Rising rates make buyers stop and think more," said Lanny Baker, chief executive of ZipRealty (ZIPR), a national real estate brokerage.
Even some of this week's good news was tempered by warnings of deteriorating market conditions.
Thursday, the NAR said existing-home sales for August rose 1.7% to a seasonally adjusted annual rate of 5.48 million. That was the highest level in over six years and above consensus estimates for a 2% decline.
"Tight inventory is limiting choices in many areas, higher mortgage interest rates mean affordability isn't as favorable as it was, and restrictive mortgage lending standards are keeping some otherwise qualified buyers from completing a purchase," Yun said in the report.
Homebuilding Pace Falters
Data on new-home sales for August are due next week. In July, sales of new houses fell 13.4% to a seasonally adjusted 394,000 annually. It was the biggest decline in more than three years, raising concern about the higher interest rates.
The Commerce Department on Wednesday reported that housing starts in August rose 0.9% from the prior month to a seasonally adjusted annual rate of 891,000 units. July's starts were revised down to 883,000 units from 896,000. Economists expected 917,000 in August.
Starts for multifamily homes fell 11.1% to a 263,000-unit rate. On the upside, starts for single-family homes rose 7% to a 628,000-unit pace, the highest since February.
Also Wednesday, the RE/MAX Housing Report noted that August home sales were up 6.5% from a year earlier, according to a survey of Multiple Listing Service data in 52 metro areas. It said median home prices rose 12.9% to $188,450.
Tuesday, the National Association of Home Builders' housing market index remained unchanged at 58 for September. It gauges builder perceptions of current single-family home sales and expectations for the next six months as "good," "fair" or "poor." A number over 50 indicates that more builders view conditions as good than poor.
Rate Worries Show
In a statement, NAHB Chairman Rick Judson said that while builder confidence "is holding at the highest level in nearly eight years," many builders say a sharp rise in interest rates has contributed to "some hesitancy" on the part of buyers.
The near-term expectation is that monthly sales numbers will start to trickle off during the fall and winter months. That's what usually happens when kids go back to school, the holidays approach and the weather turns cold.
But reading too much into sluggish sales reports would be a mistake, ZipRealty's Baker says.
"These are the months when volume trails off seasonally, and a lot of people won't be able to resist the temptation to draw a straight line from that to interest rates," he said. "But we're still seeing a pretty resilient marketplace from both the buyer and seller sides. Traffic on our website continues to grow really well year over year.
The picture will be a little clearer when homebuilders report third-quarter earnings beginning this month. Most have reported strong financials in recent quarters, though in the stock market the Building-Residential/Commercial industry group now ranks near the bottom — No. 195 of 197 IBD tracks.
Of its five biggest firms by market cap, four — Lennar (LEN), Pulte Group (PHM), D.R. Horton (DHI) and NVR (NVR) — have notched at least five straight quarters of double-digit or better sales and earnings growth.
Some industry watchers expect rates to have a bigger impact on builders' prices than homes sold.
Wilkes Graham, an analyst at Compass Point, says a CEO at one builder he follows told him that a higher mortgage rate wouldn't affect the decision whether to buy.
"But it might delay when they buy, and determine the size of the house. They will still buy, but at a lower price," said Graham, who follows nine homebuilder stocks, including Lennar, Beazer Homes (BZH), Toll Bros. (TOL) and KB Home (KBH).
That kind of trend might lead to a slowdown in this year's meteoric median home price growth, he says.
Trulia's Kolko expects prices to be higher next spring than last, "but we will not see the huge price increase we saw so far this year."