The prospect of rising interest rates is creating urgency among buyers and sellers in the housing market. Existing home sales in July surged to a pace last seen during 2007, while prices retreated modestly, a sign that the market could be shifting away from the strong sellers’ market towards a more balanced one. Turmoil in international economies that is generating unrest in the U.S. equity markets could make the potential Fed lift off a mute point if a stock market correction persists. While fear may delay an interest rate rise until October, or possibly 2016, the Fed will likely maintain course assuming job growth in August meets expectations.
In July, an annualized 5.6 million homes changed hands, which is the highest level since February 2007. A combination of a strong summer buying season and fear of rising borrowing costs facilitated the lofty number of transactions. At the same time, inventory tightened to 4.8 months, limiting options for buyers. Nonetheless, home prices dipped slightly to $234,000, which could signal that sellers are willing to negotiate. The median home price in July was 5.6 percent above last year’s level and has climbed year over year for nearly 3.5 years.
First-time buyers comprised just 28 percent of sales in July, falling from 30 percent in the previous month. The low level of new entrants into the housing market will keep downward pressure on the homeownership rate. However, higher interest rates are unlikely to hinder first-time buyers in the near term as global turmoil has generated a flight to safety, driving down 10-year Treasurys to near 2 percent. A recovery in first-time buyers remains several months away from materializing.
While strength in home sales will pit investors with traditional buyers, the overall outlook for the asset class remains positive due to a lack of first-time buyers. In fact, lower home prices in the coming months as the market moves into slower purchasing seasons should create opportunities for investors to acquire assets at a discount compared to current prices.