Higher rates hurting housing's golden goose?

INDICATOR: June New Home Sales

KEY DATA: Sales: up 8.3%; Year-over-Year: up 38.1%; Median Prices (Year-over-Year): up 7.4%

IN A NUTSHELL: "The jump in new home sales is great news but whether it was due to growing demand or fears of even higher mortgage rates is not clear."

WHAT IT MEANS: The fear is that rise in mortgage rates will harm the golden goose, the housing market. It will take a month or two longer before we see the effects on the existing home market since closings take a long time. But the new home market is based on contracts signed and the surge in purchases in June was welcome news. The sales pace was the strongest in over five years. Not only was there a pop between May and June but since June 2012, the pace of sales has jumped by over 38%. I think you can categorize that as a recovery. The big June gain occurred despite a sharp fall off in demand in the Midwest. The Northeast, South and West posted double-digit rises. Strong demand usually triggers robust price increases and that is exactly what happened. It is also bringing new supply on to the market, but not nearly as fast as demand is rising. Thus, the inventory remains limited. That should help prices but hinder sales.

MARKETS AND FED POLICY IMPLICATIONS: This was a great report but before anyone jumps to the conclusion that the higher rates will not slow the housing market, you need to recognize how people react to a surge in mortgage costs. I had warned that we could see some solid increases as people who had been sitting on the fence make a move fearing the rates could rise even more. That is likely at work here. That raises the question how long the increase can continue, especially since mortgage applications for purchases keep faltering. It may take another month for higher rates to hit the new home market but don't be surprised if we have some back up sales. A second factor is that rates have stabilized. That may keep some people on the fence. So we could have an initial knee jerk reaction followed by recognition that there is no need to panic, with the net result of softening demand. The markets, though, are likely to take the headline number as a given and wait to see if the sales really do falter. That said, it is still earnings season so the pattern of profits and outlooks for the remainder of the year are likely to be the key factors driving investor thinking until second quarter GDP is released on July 31st.