Rising Rates Increasing Home Sales

How many times over the last four or five years have you heard this?:

Rising intereste rates will damage/stop/hurt the housing recovery

Hint: When something is incessantly repeated and said to be “conventional wisdom”, one owes it to oneself to really dig into it and verify the “wisdom” part.

From Brian Wesbury on today’s existing home sales report:

All-cash buyers accounted for 22% of sales in June, down from 32% a year ago. As a result, while total sales are up a healthy 9.6% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 25.7%. So when all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. The gain in mortgage-financed sales suggests a long-overdue thaw in lending.

What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. In fact, rising rates appear to be increasing the pace of sales, as buyers look to lock in terms before the looming fed rate hikes push borrowing costs higher. The details of today’s report were solid as well. Rising prices are bringing sellers to market (inventories rose for a fifth consecutive month in June), but supply hasn’t been able to keep pace with demand. In fact, the average time it took to sell a home in June decreased to 34 days from 40 in May, the fastest pace since recording began in 2011. Look for more inventory to come to market in the year ahead as “on-the-fence” sellers move to take advantage of higher prices.

In other housing news this morning, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.4% in May and was up 5.7% from a year ago.

I’ve been pounding the table for a couple years that rising rates will aid, not hinder the housing recovery for a few reasons:

1- More credit will become available to those currently shut out as banks will enjoy more favorable spreads on all loans

2- Those buyers on the fence will be pushed to buy before rates rise again

3- Those on the fence on whether or not to sell will also be incentivized to sell (if they will use a mortgage to buy on the other side they’ll to do so before rates rise further). This will bring much-needed inventory to market

4- More transaction on both new and existing homes will be a huge benefit to the overall economy which will spur even more activity (virtuous circle).

The housing market is really the last part of the economy to fully recover from the recession. The main reason is artificially low rates  that have restricted credit across the credit spectrum. Higher rates will cure that and we could see the rest of 2015 and especially 2016 set up for significant growth in the overall economy spurred by housing’s resurgence.

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