Expectations Theory Sways Markets

Existing-home sales soared to 5.39 million annualized units in July, far surpassing the consensus estimate for 5.12 million units. The NAR cited “panic” over rising interest rates for the surge in buying activity.

“ Panic” might be an overstatement. Expectations, more than anything, was the likely motivator. More consumers, shocked by the spike in lending rates that occurred two months ago, expect both interest rates and housing prices to push higher.

Therefore, it's understandable that buyers acted as they did. The past – at least the near-term past – is frequently prologue.

On the lending front, rates have moved to a higher plateau compared to the plateau they occupied earlier this year. This past week, mortgage rates moved notably higher again, as if they were attempting to reach an even higher plateau. Rates today are about where they were two years ago.

Rising rates have jarred memories: Everyone today now realizes rates don't move only down; they also move up.

A few years ago, it appeared home prices could move only down. Since then, price action continues to prove that's hardly the case.

The median price of an existing home rose to $213,500 in July, a 13.7% increase from July 2012. This marked the 17th-consecutive month where prices have increased year over year. As improbable as this might seem, the national median price is a mere 7.3% below the all-time high of $230,000 that existed seven years ago.

It can be dangerous to extrapolate a trend indefinitely; trees don't grow to the sky, submarines don't descend to the depths of the ocean. But trends can hold for a while. We expect both trends – higher mortgage rates and higher housing prices – to prevail into the relevant future.

The Federal Reserve assures us that mortgage rates will occupy a higher plateau. (We further explicate this subject below.) Home prices will remain at a higher plateau as well. Inventory remains tight, and buyer interest continues to expand.

Just as important, the composition of the housing market is as healthy as it has been in years: Foreclosures and short sales continue to drop as a percentage of overall sales. Concurrently, price appreciation continues to lift more owners above water.

Expectations point to less affordable housing in the future, so it's perfectly logical to act (buy) on those expectations today.

Courtesy of Jessica Regan.

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