US: Home Sales Plunge As Bad Weather Bites

February home sales plunged as winter storms and generally cold conditions deterred buyers. Sales are likely to bounce back in March, but rising mortgage rates and a dearth of supply are a constraint over the longer term. Another issue is surging house prices, which could create a major headache for the Federal Reserve.

Source: Shutterstock

Winter storms keep buyers inside

Yesterday’s existing home sales and today’s new home sales data for February both showed substantial declines as the harsh mid-month winter storm and generally cold conditions across the country dampened buyer appetite.

New home sales took the bigger hit, falling 18.2% month-on-month. New home sales are recorded at the point the purchase contract is signed so will have been directly affected by fewer buyers venturing out into the cold. The 6.6% decline in existing home sales, which are recorded as transactions when contracts are closed, would have been impacted by disruption to working practices.

Housing transactions fall with rising mortgage rates an ongoing risk

Source: Macrobond, ING 

Rising mortgage rates starting to weigh on demand

March is likely to see a strong rebound in sales, but we don’t expect to see new cycle highs given the decline in mortgage applications for home purchases. This series peaked in the second week of January and has fallen sharply, likely reflecting the recent increase in mortgage rates. This is quite a big drop-off seeing as mortgage rates have only increased around 40bp while longer-dated Treasuries have risen by 70bp. With Treasury yields continuing to grind higher, there is certainly more upside to mortgage interest rates in the months ahead, although housing demand should be underpinned by a strong economic recovery and robust employment growth over the next few years.

Supply of homes for sale at record lows

Source: Macrobond, ING 

Few bargains to be had

At the same time, supply is very tight with the inventory of existing homes at record lows – equivalent to just two months-worth of sales. It is marginally better for new home sales at 4 months, but that is a much smaller section of the overall property market. This is likely to further limit the scope for an increase in property sales. Those few properties that are for sale are being snapped up within 20 days of going on sale on average. This lack of inventory amidst decent demand is pushing prices higher with the median price of an existing single-family home up 15.8% year-on-year with new home prices rising by 5.3%.

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