The home sales figures in May point to the biggest rise in four years for previously owned US homes. After a slow start at the beginning of the year, this is the sign that the residential real estate market is recovering.
As reported by the National Association of Realtors, there has been a 6.1% increase in the pending home sales index, which is the largest growth since April 2010. Even the most optimistic estimates by Bloomberg survey of economists, was left far behind by reality. The median forecast was a 1.5% gain.
The cheaper borrowing costs and the more positive employment evolution encourage the rise in the housing demand by making access to home loans a lot easier. Moreover, the income limitations and the higher home prices are preventing the residential real estate market from expanding more broadly.
It’s a clear fact that housing is bouncing back again, as observed by Paul Ashworth chief economist at Capital Economics Ltd. in Toronto. The company had a 4% gain forecast – the highest in the Bloomberg survey. The housing recovery period contributes to improving people’s confidence to join in the market. Home loan rates have dropped a bit, and home prices are on the rise. The conclusion to be drawn here is that default on home loans is less common.
In April, the reported gain was 0.4%, and the Bloomberg estimates for May ranged from 0.5% decline to 4% increase. It’s been four years since we’ve had such a big gain; back then, the increase was due to first-time buyers rushing to sign contracts prior to the expiration of a tax credit.
In contrast with May, June brought a cooling in manufacturing. The Chicago Institute for Supply Management Inc.’s business barometer dropped from 65.5 in May to 62.6 in June. According to the median forecast, the gauge was expected to go down to 63. With readings higher than 50, this is a clear expansion signal.
The rise in stocks followed these data, with the Standard & Poor’s 500 Index going up by 0.1% to 1,962.77 at 10:35 a.m. in New York City. There was also a 1.5% increase in the S&P Supercomposite Homebuilding Index.
On an unadjusted basis, purchases dropped 6.9% from the year before. This rise followed a 9.3% decrease over the 12 months that ended in April.
The pending sales index reached 103.9 on a seasonally-adjusted basis, the highest level since September 2013. According to NAR, a reading of 100 represents that correspondent of the average level of contract activity in 2001, which can be labeled as “historically healthy” home-buying traffic.
Pending home sales improved in all four regions, with the Northeast being the leader with an 8.8% gain. A 7.6% increase in contract signings was reported in the West, 6.3% in the Midwest and 4.4% in the South.
The pending sales represent a leading indicator, as economists track contracts for new purchases. The tabulation for existing-home sales takes place when a contract closes, usually a month or two later.
With the release of the NAR report, their chief economist Lawrence Yun assessed that this first-time buyer participation ought to be encouraged by solid income growth and a slight easing in underwriting standards. The time is right for such changes particularly with the increasing renting costs.
The stagnation in home sales early this year has been slowly overcome. The May rise in new home purchases was the biggest in 22 years. The 18.6% rise is the most significant one-month gain since January 1992. The Commerce Department reported 504,000 annual purchases.
Residential property prices
The rise in home prices is cooling off, meaning that prospective buyers with access to credit will have more properties to choose from.
Last week’s report further showed a 10.8% rise in the S&P/Case-Shiller index of property values from April 2013. This value represents the smallest 12-month gain in over a year, after a 12.4% increase in March.
Hovnanian Enterprises Inc., New Jersey’s largest home builder, has an optimistic outlook on the market evolution. The estimated rise in home demands is expected to continue despite the uneven evolution in recent months.
The recent recovery has been rougher despite the dramatic improvement in the housing market. The primary power engine of long-term housing demand will be household formation. This trend seems to have the support of employment and payroll figures, which look promising for home buyers. Housing and income are closely related, and the estimates continue to look positive for the market players, be they home builders, home-improvement retailers or lenders.
Home prices stay on the rise, despite the decline in housing turnover!