Rising Rates May Slow Comeback in Home Sales
A 3-month-old revival in home sales may be in danger of weakening.
The steep drop in housing prices and mortgage rates that stimulated the real estate resurgence appears to have ended, experts say. The developments have prompted some analysts to reduce their forecasts for housing sales and lower their expectations that the nascent housing rebound might help propel the nation out of its long recession.
“Looking ahead, we don’t anticipate as strong a growth in housing sales because the economy hasn’t bounced back,” said Leslie Appleton-Young, vice president of research for the California Assn. of Realtors. “There is upward pressure on median home prices. . . . You have higher unemployment.”
Furthermore, the overall economic recovery needed to bolster home sales might not arrive “until later this year, and even then, it will be of modest dimensions,” said Richard Peach, deputy chief economist for the Mortgage Bankers Assn. in Washington. “The housing sector can be a locomotive for just so long until the overall economy itself has to improve and pull the housing sector along with it.”
After declining for several months, mortgage rates have started to rise. Yields on 30-year Treasury bonds--to which fixed-rate mortgages are linked--have risen sharply recently, sparking concern that mortgage rates will soon rise to double-digit levels. And that, analysts say, could scuttle sales.
Meanwhile, home prices have resumed their upward march in some places.
In California, the median price of an existing, single-family detached home climbed to a record high $205,680 in April, up 1.7% from a revised $202,170 in March and 4.9% higher than a year ago, according to the California Assn. of Realtors.
Although prices are still dropping in some Northeast and Midwest cities such as New York, Boston, Detroit and St. Louis, prices are expected to climb in Atlanta, Chicago, Las Vegas, Portland, Ore., and Seattle, according to Pittsburgh-based Lender’s Service Inc., an appraisal management company that recently surveyed 525 residential appraisers in 100 metropolitan areas.
New-home sales rose in April for the third consecutive month, according to the latest statistics from the Commerce Department. But even small cost increases--whether higher closing costs, mortgage rates, prices or taxes--can push the dream of homeownership beyond the reach of thousands of Americans.
The National Assn. of Realtors, for example, said a $2,000 increase in the average price of a home caused its latest housing affordability index to fall in April for the third consecutive month.
The association said a family earning the median income of $36,057 had 111.4% of the income needed to qualify for conventional financing covering 80% of a home with the median price of $100,200. That was 1.9 percentage points less than the qualifying income consumers had in March and 4.1 percentage points below February.
Some experts say housing affordability, although much more attractive than a year ago, is starting to have an impact on some house hunters who had invaded real estate offices in droves earlier this spring amid news that home prices and mortgage rates had dropped to four-year lows. Brokers and developers who once thought strong home buying activity in March and April would help the housing market stage a comeback in 1991 are now having second thoughts.
“We don’t think the market is quite as strong and robust as it seemed to be three or four months ago, right after the war” in the Persian Gulf, said R. Chad Dreier, senior vice president and chief financial officer of Kaufman & Broad Home Corp. “Price has become an issue” for house hunters, he said.
The current housing climate appears to be attracting mostly first-time home buyers or those who sold their homes in the months before the housing slump began last summer and have cash to entice quick sales, Dreier said.
Existing homeowners, particularly those who bought in the past four years, say they can’t get the price they want for their homes and thus can’t move up to larger, more expensive homes.
“This perception that housing prices are a bargain only works if you are a first-time buyer,” said Irwin Kellner, Manufacturer’s Hanover Corp.’s chief economist. A recent homeowner “doesn’t benefit as much from lower prices as a first-time buyer because the value of his home may not have risen” enough to generate enough gain for him to afford to move.
That’s the predicament facing Pasadena lawyer Brian G. Hummel.
Hummel is house hunting but can’t buy until he finds a buyer for his current home, which he purchased three years ago. His home has been on the market for two months for an asking price of about $350,000.
Hummel said 18 months ago he had actually secured a buyer at his current asking price but scuttled the deal when he was unable to purchase another home. This spring, however, Hummel is finding buyers much harder to come by. An open house he held early last month drew no visitors.
“My Realtor said it was the first time that had ever happened to her,” Hummel mused.
Anxious home sellers such as Hummer will find little relief in a new Conference Board study of consumer confidence. The study found that only 2.7% of consumers surveyed said they had plans to buy a home within the next six months, down from 3% in April and off from the 4.2% posted in March.
Consumers’ fears of taking on additional debt comes on top of other recent developments that threaten to push homeownership financially out of the reach of thousands of Americans.
Last week, for example, the federal government said it is imposing higher closing costs on mortgages backed by the Federal Housing Administration--a move that the Mortgage Bankers Assn. estimated could reduce home sales by as much as 200,000 units annually. On a $100,000 FHA loan with typical closing costs of $2,500, a home buyer would pay an additional $1,000 because of the new regulations.
Meanwhile, some jurisdictions--squeezed by recession-induced revenue shortfalls--are raising real estate taxes, said Marcia Howard, deputy director of the National Assn. of State Budget Officers in Washington.
In Los Angeles, for example, a local real estate transfer tax designed to raise $57.2 million is scheduled to go into effect July 1, requiring new home purchasers to pay an additional $4.50 per $1,000 in market value, or $900 extra on a $200,000 home.
Although the cost increase appears nominal in light of the $211,310 cost of the average home in Los Angeles, the California Assn. of Realtors says that for every $1,000 increase in the cost of a Los Angeles home, 2,300 additional buyers can’t qualify for a mortgage.
Housing Affordability Index
The typical American family’s ability to buy an existing home, though improved over a year ago, has slipped since February.
Median Mortgage Affordability Date home price rate* index** All of 1990 $95,500 10.04% 110.2 January, 1991 $95,600 9.80% 112.7 February $94,000 9.75 115.5 March $98,200 9.50 113.3 April $100,200 9.51 111.4
*Effective rate on loans closed on existing homes. Source: Federal Housing Finance Board.
**The index meant that in April, a family earning the median income of $36,057 had 111.4% of the income needed to qualify for conventional financing covering 80% of a home with the median price of $100,200.
Source: National Assn. of Realtors
