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Posted in Charts, Economics, Email Bulletins Archive, Housing, Lee's Free Thinking

Pending Home Sales Up 8.6% Disprove The Idea That Higher Rates Are Slowing The Bubble

As the media report a decline in the number of contracts to purchase existing homes in July, the truth is a little different. They’re talking about the seasonally adjusted headline number, representing an idealized month to month change. That isn’t the actual number. The actual number of  contracts did fall from June, but they normally do that in July. The seasonally finagled data overstate the case.  The actual number of contracts fell 8.5% in July from June, which is near the average decline of -9.3% for July over the prior 10 years.  It is similar to the decline of -8.1% in July 2012, and a big improvement from the -13.5% decline in July 2011.  The idea that last month was somehow worse than normal simply is not true.  Furthermore houses sold at a faster clip in July than in July 2012 when rates were far lower than today.

Contracts To Purchase Existing Homes- Click to enlarge
Contracts To Purchase Existing Homes- Click to enlarge

In short, July was right on trend, with no evidence of an adverse impact from higher mortgage rates. If there had been an adverse impact, then July’s decline would have been significantly larger than the average, and in particular significantly larger the past 2 years when mortgage rates were falling. Instead the drop was only slightly greater than last year, but far less than in 2011.

On a year to year basis July contracts rose 8.6%. Mortgage rates were far higher this July than in July 2012. The fact that sales are higher indicates that higher rates have yet to put a crimp in housing demand. They will going forward, but we haven’t reached that point yet.

The 8.6% growth rate is slower than the year to year gains of the past 3 months which peaked at 13.5% in April, but it’s well above the low point of a 4.3% year to year gain in February.  Just eyeballing the red line on the chart above, we see a slight slowing in the uptrend, that’s all.

Tight inventories continue to hold sway over the market, possibly impacting the number of sales, and keeping upward pressure on prices. With demand still in an uptrend, a larger increase in inventories would be required to put a lid on the price gains.

Existing Home Inventory/Contracts Ratio- Click to enlarge
Existing Home Inventory/Contracts Ratio- Click to enlarge

The inventory to contracts ratio stood at 4.85 in July. This is a 7 year record low for the month of July, down from 5.54 in July 2012 and a peak of 10 in July 2010.  While a normal seasonal uptick in this ratio has begun, prices are likely to continue rising until the trend of this ratio turns materially higher.

Yesterday I reported (House Prices Are Rising Faster Than Case Shiller Says, Market Is Tight) current data from several other sources that contradict the idea promoted in the mainstream media that the housing bubble is slowing due to the rise in mortgage rates. While that is likely at some point, the it hasn’t happened yet.  The risk of an approaching Housing Crash II is still growing as house prices gain at the rate of 16-18% per year nationally, and far faster in the hottest bubble markets.

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