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The slowing U.S. housing market may have finally bottomed

After a months’ long slowdown, the U.S. housing market may have bottomed.

“We are seeing signs of a rebound,” said Neil Dutta, head of economics at Renaissance Macro Research (RenMac), noting that a recent drop in mortgage interest rates has been a key driver.

The number of people in the U.S. who applied for a loan to buy a home rose 13.5% for the week ending Jan. 11 from a week earlier, according to the Mortgage Bankers Association Wednesday. That was the highest level since February 2018. The MBA’s seasonally adjusted Purchase Index increased 9% from a week earlier — the highest level since April 2010. The activity is attributed to a decline in mortgage interest rates since mid-November. Freddie Mac said on Thursday the average rate on benchmark 30-year, fixed-rate mortgage remained steady at 4.45%.

“Buyers will want to take advantage of the lower rates – now 4.5% compared to 5% just last month – and past historical relationship suggests around 200,000 additional home sales as a result over the course of the year,” Lawrence Yun, chief economist at the National Realtors Association, said via email. “This additional demand will help absorb inventory. Both home prices and home sales will be lifted.”

There have even “been a handful of anecdotal reports that buyer traffic has revived a bit now that mortgage rates have fallen,” according to a Wells Fargo note on Wednesday, adding that “sentiment on the housing market is currently too pessimistic.”

Rate pullback revives housing demand

Price growth has been slowing for the past six months a positive for the market. “Home price moderation in many markets is happening in a time when it looks like income growth generated from labor market and wages are picking up,” said Dutta. “Price-income ratio is moving in the right direction for a lot of people.”

Homes sales data for November and December have not been released due to the partial government shutdown, which began on Dec, 22, but “purchase apps do a reasonably good job tracking the swings in new home sales and the latest data are reason for optimism,” Dutta added.

Homes are selling.

Wells Fargo economists expect modest improvement in new and existing home sales this year, up 1.6% and 0.6%, respectively. “The moderation in home prices and pullback in mortgage rates should help revive demand in coming months,” they said.

“Uncertainty regarding the government shutdown, slowing global growth, Brexit, a more patient Fed, and a volatile stock market continued to keep rates from increasing,” said Mike Fratantoni, MBA senior vice president and chief economist, in a press statement. “The spring homebuying season is almost upon us, and if rates stay lower, inventory continues to grow, and the job market maintains its strength, we do expect to see a solid spring market. The 11% gain in purchase volume compared to last year is a promising sign.”

Also on Wednesday, home builders started 2019 a little bit more optimistic. Builder sentiment rose 2 points to 58 in January from a three-year low of 56 in December, according to the National Association of Home Builders, which tracks sentiment on a monthly basis. The result reversed two months of declines. The NAHB index component that tracks current sales conditions rose 2 points to 63 and expected conditions over the coming six months was up 3 points to 64. A result above 50 on the index is positive.

“A decline in interest rate is a powerful tailwind for housing,” said Dutta.

Amanda Fung is an editor at Yahoo Finance.

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