Housing Market Weakness Stings Growth Optimism

June 30, 2016United Statesby EW News Desk Team

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Just as the U.S. Government and Federal Reserve are getting more optimistic about America’s growth prospects, new data shows the housing market may be topping out.

Pending home sales fell a shocking 3.7% in May, versus a 1.1% expectation and a sharp reversal from April’s 3.9% jump. The new study by the National Association of Realtors (NAR) saw pending home sales fall on a year-over-year basis for the first time since 2014, as tapped-out Americans struggle against persistent home price growth.

"Realtors are acknowledging with increasing frequency lately that buyers continue to be frustrated by the tense competition and lack of affordable homes for sale in their market,” said NAR Chief Economist Lawrence Yun, who added that inventories continue to weaken, making the housing market tougher for buyers.

"Total housing inventory at the end of each month has remarkably decreased year-over-year now for an entire year. There are simply not enough homes coming onto the market to catch up with demand and to keep prices more in line with inflation and wage growth.”

Another gauge of current housing activity also showed purchases are down. The Mortgage Bankers’ Association saw a 3% decline in home purchasing, as total mortgage applications fell 2.6%.

Refinancing activity also declined, a stunning result considering mortgage rates have been consistently falling as U.S. Treasuries continue to slide. The 10-year Treasury has dipped to its lowest point in history, causing mortgages to reach their lowest point since May 2013. Currently, 30-year fixed-rate mortgages have an average 3.75% interest rate, according to the MBA.

The decline in activity and decline in interest rates has befuddled housing economists, who assume there is a causal and inverse relationship among the two as cheaper loans encourages more home buying and mortgage refinancing. Additionally, easier credit from lower standards has also helped more Americans to qualify for loans, but that is not encouraging them to acquire the debt.

The weak results in the housing market may be an effect of weak personal income growth, which rose just 0.2% on a month-over-month basis in May, far below the 0.7% expectation and 0.5% growth in April. Meanwhile, prices for consumers as measured by the Core Personal Consumption Expenditures Index rose 0.2% on a month-over-month basis, indicating that Americans are not actually earning more on an inflation-adjusted basis.

Consumers, however, are spending more. The Bureau of Economic Analysis study saw consumer-spending rise 0.4% on a month-over-month basis, as analysts had expected. The increase in spending beyond the increase in wages indicates Americans are willing to spend more and save less. The effects of this trend on GDP growth encouraged the Atlanta Federal Reserve to boost their second quarter GDP growth expectations to 2.7%.