October 5, 2013

Housing recovery likely to survive rate jump

Brokers see eager buyers and analysts expect stable increases in home sales over the next year.

By Alex Veigaap
The Associated Press

LOS ANGELES — When mortgage rates began climbing in May from rock-bottom lows, Kevin Williams worried he might miss out on an opportunity.

click image to enlarge

Brokers report strong buyer traffic in the Boston area, where this house in Walpole is on the market. Home prices in the nation have been rising at the fastest pace since 2006.

The Associated Press

So he listed his home in Orange County, Calif., and planned to buy a bigger house in San Diego after it sold. The process took all summer. Last week, he and his wife locked in a mortgage.

The extra time added at least $1,000 more a year than if they had secured a loan in May. Still, Williams believes they made a prudent decision.

“I don’t know what rates are going to be in four years,” he said. “I felt I had to act now before I was priced out.”

Williams’ justification – buy now or risk paying more later – is why many brokers and analysts remain confident that the housing recovery can handle higher mortgage rates. While the jump in rates should test the strength of the recovery, analysts foresee stable sales increases over the next year for a number of reasons.

Fall is typically a sleepy time for sales and nationally signed contracts are starting to decline. Yet several brokers say buyer traffic remains strong in key markets like Los Angeles, the Washington metro area, Silicon Valley and Boston.

Home prices have been rising at the fastest pace since 2006, helping Americans regain wealth they lost during the housing crisis. Many would-be sellers have been waiting out the downturn and could put their houses on the market in the next year. That should ease supply constraints, one of the biggest obstacles for sales over the past year.

Financing a home is still more affordable than in decades past. The average rate on a 30-year mortgage remains a bargain at below 5 percent, and many buyers sense it won’t stay that low for long.

There’s also pent-up demand. A growing number of people are moving out from group homes or with relatives to form their own households, according to U.S. Census data. Sales typically increase when households grow.

“It’s the demographics that make a strong housing recovery pretty much a sure thing,” said Patrick Newport, a housing economist at HIS Global Insight.

Newport expects sales will rise 10 percent this year to 5.14 million. After that, he predicts an 8 percent gain next year to roughly 5.55 million and a 4.5 percent rise in 2015 to 5.8 million. All are relatively healthy levels.

The last time sales exceeded 5 million was in 2007, when the housing bubble burst. From 2008 through 2012, sales averaged 4.3 million a year.

The average rate on a 30-year fixed loan this week was 4.22 percent, according to Freddie Mac. That’s above the average of 3.35 percent reached in May, but it’s far below the average rate of 7 percent since 1985, according to Bankrate.com data.

Rates tend to rise when the economy is strengthening. More jobs and better pay would likely boost home sales.

Still, the increase in rates has added thousands of dollars to the cost of a financing a home. And there’s some concern that the government shutdown could delay the processing of some home loans, particularly those backed by the Federal Housing Administration.

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