Is Short-Term Volatility a Long-Term Worry?

Things have gotten a bit bouncy of late. The velocity of up-and-down movements in housing data has certainly increased in recent weeks.

Home prices are an example. Last month, the S&P/Case-Shiller Home Price Index showed prices were mostly up in the 20 metropolitan districts it follows. This month, prices are somewhat more scattered.

Case-Shiller reports surprising price weakness in many markets. Specifically, home prices declined in 12 of the districts it follows. When the numbers are tallied, the index shows a 0.2% decline for May. This is on top of a downward revision in April's numbers. Year over year, the rate of price appreciation has eased to 4.9%.

Activity pertaining to new home sales could be a contributing factor in Case-Shiller's numbers. New home sales can be volatile, and sales were certainly volatile in June. Sales plunged a surprisingly steep 6.8%, posting at 482,000 units on an annualized basis. What's more, revisions erased 40,000 new home sales from the prior two months.

The good news is that the price of new homes are holding steady, with the median price posting at $281,800, a 0.5% monthly increase. Price appreciation will likely remain anemic, though. There are an estimated 215,000 new homes on the market. At the June sales pace, the current supply rises to 5.4 months compared to 4.8 months in June. More supply coupled with slowing sales points to slowing price appreciation at the national level.

Of course, what happens at the national level frequently has no bearing at the local level. Markets are segmented by location and by property type. Price appreciation in many markets has stagnated at the higher echelons. Lower down, price appreciation remains brisk. That's an issue for new potential home owners (younger people). Homeownership rates remain stubbornly low. In fact, the homeownership rate for the second quarter of 2015 fell to 63.4%, the lowest rate since 1967. Much of the decline can be traced to a dearth of first-time owners.

The obvious question is, are higher mortgage rates dragging the market down?

Existing home sales for June were surprising strong, but a change in mortgage rates lags in the existing-home-sales data. New home sales are reported when the contract is signed; existing home sale are reported when the transaction closes. If higher mortgage rates are an issue, we should expect to see a slowdown in existing home sales for July and August.

We suspect that higher mortgage rates aren't the issue. The Mortgage Bankers Association reported that purchase applications were up again last week. Year over year, purchase activity is up 18%. If we focus on just new-home purchase activity, we find that activity is trending hire.

In short, we view recent volatility in home sales and prices as being similar to a case of indigestion. No need to worry, because this, too, shall pass.

Information provided by Jessica Regan.

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