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Lower rates should spark home-sales rebound

Economists say sluggish home sales this spring don’t foreshadow an impending bust in the housing market.

Although the recent drop in home sales and decelerating price gains indicate that fewer people were shopping for homes this spring, economists say the market will likely heat up this summer and fall. 

HomeTour“I think we're going to see a sharp pickup in home sales, and that'll probably lead to a little bit of a pickup in home-price growth,” CoreLogic chief economist Frank Nothaft said during a recent interview with Scotsman Guide News.

The traditional spring homebuying season got off to a mediocre start. Existing-home sales were down by 4.4% year over year in April to an annualized pace of 5.2 million, according to the National Association of Realtors. Sales also were down 5.4% annually in March.

Nothaft said the recent drop in the 30-year fixed mortgage rate to less than 4% will likely bring buyers back through the latter half of the year. Another positive factor for the home-purchase market is that wages have increased solidly over the past year, at roughly 3% annually, and the U.S. economy is still adding jobs.

Nothaft said that aggregate home-price gains have moderated to about 3.7% annually, which was up marginally compared to March but remains well below the 6% annual pace of appreciation a year ago. Higher wages and slower home-price growth have made homes relatively more affordable, but lower rates will be the biggest factor in spiking homebuyer demand this summer, according to Nothaft.

“That changes the affordability equation because a lot of perspective homebuyers, a lot of families, they’re looking at their monthly cash flow, how much income is coming in and how much they feel comfortable spending per month on a mortgage payment,” Nothaft said. “And with mortgage rates at 3.99%, that really does change the affordability equation. It’s one percentage point lower from last November, just six months ago, the lowest in 16 months.”

Mark Fleming, chief economist at First American Financial Corp., also said lower rates will likely motivate people to buy homes throughout this year. The U.S. housing market remained broadly affordable — historically speaking — even when nominal home prices were still rapidly accelerating last year, Fleming said. But when rates rose to nearly 5% last fall, that made it tough on first-time buyers to afford a monthly mortgage payment.

“It’s not about the nominal [home] price,” Fleming said in an interview. “We focus on the nominal price, but we actually don’t make our buying decisions based upon the nominal price. We make the buying decision based upon how much [we have to pay] per month, and that means that buying power is an important factor.”

First American’s real price index is adjusted for income gains and changes in mortgage rates, and suggests that, in March, home affordability improved for the first time since 2016.

“The falling mortgage rates, to the extent that they’ve come down in the last couple of months, is really improving buying power relative to even just a year ago,” Fleming said. “And that’s helping to make homes, even though the nominal prices are high, seem more affordable. That is a big distinction in the marketplace today.”

One downside for buyers, however, is that home prices are expected to rise at a faster pace over the next year as more people shop for homes. CoreLogic’s Nothaft predicted that home prices will increase by 4.7% in the 12 months through next April.  


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