Blog posted On June 18, 2018
Last week, the Federal Open Market Committee (FOMC) voted to raise the benchmark interest rate, and mortgage rates reacted accordingly. This week will be a big week for housing news, with the National Association of Home Builders’ (NAHB) housing market sentiment index scheduled for release on Monday, housing starts and building permits on Tuesday, and existing home sales on Wednesday.
The NAHB housing market index is based on a survey of builders’ perceptions on current sales conditions, sales expectations for the next six months, and buyer foot traffic. Any reading above 50 is considered positive. In May, the housing market index rose to a composite level of 70. Current sales conditions increased to a level of 70, and sales expectations for the next six months and buyer foot traffic were unchanged at levels of 77 and 51 respectively. While tough tariff talk causing materials costs to increase is rattling some home builders, sustained buyer demand is keeping the construction industry busy.
Housing starts track ground broken on residential projects and building permits track permits issued. In April, housing starts dropped 3.7% month-over-month to a seasonally adjusted annual rate of 1.287 million units. Building permits also declined, down 1.8% month-over-month to a seasonally adjusted annual rate of 1.352 million units. However, single-family home building specifically increased 0.1% month-over-month, as buyer demand continues to outpace supply of homes for sale.
Existing home sales or resales track the sales of previously constructed homes and account for the majority of residential real estate transactions. In April, existing home sales dropped 2.5% month-over-month and 1.4% year-over-year. National Association of Realtors (NAR) chief economist Lawrence Yun explained, “The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home.” Even with mortgage rates rising, most housing professionals agree, lack of available homes for sale is the bigger obstacle in today’s market.
As mortgage rates rise, home price appreciation will likely start to slow proportionately. Home builders are busy replenishing housing inventory as more buyers, especially first-time home buyers, enter the market. Home buyers who get preapproved for mortgage financing before they start shopping have an advantage over shoppers who have not started the mortgage application process. Transaction timing is critical in today’s competitive market.