Saturday, August 30, 2014
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Rising interest rates may slow recovery

Economics in a nutshell: With mortgage rates rising, the sharp rise in prices may create some affordability issues and slow the housing and therefore the economic recovery.

Rising interest rates may slow recovery

FILE - In this Monday, May 13, 2013 file photo, gardener Jose Lopez trims the front lawn of a home for sale in Alhambra, Calif. U.S. home prices jumped 12.1 percent in April from a year ago, buoyed by strong demand and a limited supply of available homes. (AP Photo/Nick Ut, File)
FILE - In this Monday, May 13, 2013 file photo, gardener Jose Lopez trims the front lawn of a home for sale in Alhambra, Calif. U.S. home prices jumped 12.1 percent in April from a year ago, buoyed by strong demand and a limited supply of available homes. (AP Photo/Nick Ut, File)

INDICATOR: May New Home Sales/April Housing Prices

KEY DATA: New Home Sales: up 2.1%/Case-Shiller 20-City Home Prices: up 2.5% (12.1% over the year)/ FHFA Home Prices: up 0.7% (7.4% over the year)

IN A NUTSHELL: "With mortgage rates rising, the sharp rise in prices may create some affordability issues and slow the housing and therefore the economic recovery."

WHAT IT MEANS: The housing market is continuing to improve and we are seeing it in the existing and new home market. Purchases of newly built product rose a little less than expected in May but they are still up a whopping 29% from the May 2012 level and for the first five months of the year compared to the same period last year. In other words, builders are moving the product quite nicely even if sales need to double to get back to more normal levels. Regionally, a bounce back in the Northeast, the weakest area, helped in May. It was a decline in the South that kept the pace from really zooming. The rising sales rate is bringing forth more houses for sale, but not very rapidly. The months supply, which is low, has been largely stable for last four months. That has led to soaring prices, which were up over ten percent from last May.

The jump in new home prices is mirrored in the surveys of existing home prices. Whether you look at the S&P/Case-Shiller or the Federal Housing Finance Agency's index, the gains over the month and the year are impressive. We are looking at double-digit rises since last spring and those increases are spread widely across the nation.

MARKETS AND FED POLICY IMPLICATIONS: I have argued that the rise in home prices is good and I am not worried about double-digit gains. We are still at relatively low price levels in many parts of the country and the increases are starting to allow many owners to get back above water. We are not talking about high prices yet, just rapidly rising prices. High prices in most areas are a long time away. With equity rising, the normal "churn" can return and we might also see some investors starting to cash in. That would add to supply and slow the price rise. All seemed to be going swimmingly until Mr. Bernanke decided to "clarify" things. Now, mortgage rates have surged and that is reducing affordability. However, rates are still low, historically, so while demand might slow it will not collapse. Still, let's home the Fed Chair doesn't try to "clarify" things even more. That can only lead to further disasters. I suspect few will be clamoring for Mr. Bernanke to be reappointed. President Obama pretty much indicated that was not going to happen but in this country, any political action follows Newton's Third Law of Motion: there is an equal and opposite reaction. It was expected that some would push back on Mr. Bernanke leaving but I don't expect a whole lot of that to happen now.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
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