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Higher interest rates could actually be good for the housing market

Nicole Sinclair
Markets Correspondent
A single family home is shown under construction by Toll Brothers Inc, the largest U.S. luxury homebuilder, in Carlsbad, California, United States May 23, 2016. REUTERS/Mike Blake

The S&P 500 ( ^GSPC) has been resilient this week despite the rising chances of a Fed interest rate hike in the coming months. One of the reasons? Strong data on US new home sales in April, which grew at the fastest rate in eight years, supported the view the economy may be strong enough to withstand an interest rate increase as early as June.

And one key housing executive agreed. During Toll Brothers' (TOL) second-quarter conference call on Tuesday afternoon, Chairman Robert Toll said that rate increases could actually spur demand.

“What you have with a price increase is an increase in demand created because the price has gone up, which by the way may come to us in the summer months this year,” he said. “If the Fed goes up and the mortgage rates go up an eighth or a quarter, it probably means price increases are coming soon, which spurs demand and spurs action. So it's too early yet to tell, but we could be onto something good.”

US home prices rose 5.7% in the first quarter of the year from a year earlier, according to the Federal Housing Finance Agency (FHFA). This marked the 19th consecutive quarterly gain.

 

Toll added that a recent US Census report indicated suburban populations are on the rise, which is supportive of the new home market.

“As millennials mature, studies indicate that their appetite for homeownership is consistent with past generations, which is, of course, encouraging for our industry,” he said. 

Toll reiterated the importance of the strong April new home sales data.

“The release stated this represents a supply of 4.7 months at the current sales rate. With a little bump in demand we could be off to the races,” he said.