Lower prices and still-low mortgage rates continue to create traction in the existing-home market.The pending home sales index is the latest in a series of recent data releases that prove that economic laws continue to hold: lower prices stimulate demand. On that front, lower prices helped lift the index 10.4 percent to post a 93.3 reading in October. The positive takeaway here is that recent gains portend strong existing home sales for November and December and a positive sales trend heading into 2012.

New home sales have also trended higher in recent months, moving up 1.3 percent to an annualized sales rate of 307,000 units in October. The median price of a new home eased 0.5 percent month-over-month to $212,300, but the year-over-year rate turned positive, at plus 4.0 percent. The news on supply was even more encouraging, with inventory falling to 6.3 months at the current sales rate – the best reading since April 2010 when government tax credits were stimulating sales.

To be sure, pricing remains a bugaboo for new and existing homes in many markets. Lower prices do clear inventory, but they also tend to hinder participation, as more potential buyers are reluctant to buy what they perceive they are buying a depreciating asset.

But severe discounting remains confined to specific markets, notably Atlanta, Phoenix, and Las Vegas. The latter two metropolitan areas continue to post new lows. For much of the nation, though, the severe discounting that occurred from 2007 through 2009 appears to be a thing of the past. Most of the nation should continue to experience price stability, with only minor to modest discounting in selected markets.

The Federal Reserve made news last week that could impact any discounting of mortgage rates. The Fed, along with the world's major central banks, acted to provide cheap-dollar funding to European banks crippled by the debt crises that plague the Mediterranean European countries. In short, the Fed and its European confreres staved off a possible financial collapse in Europe that could have spread to the United States.

Investors responded to the central bankers' unprecedented action by moving out of U.S. Treasury securities and into stocks. The Dow Jones Industrial Average surged 4.2 percent on Wednesday to post its biggest gain since March 2009. Treasury yields also moved higher, with the yield on the 10-year Treasury note, the benchmark investment for 30-year fixed-rate loans, rising to 2.1 percent. Mortgage rates, in turn, moved higher across most financing options.

Here's something to keep in mind: Treasury yields and mortgage rates tend to rise with the stock market. If stocks continue to rise, more money will leave fixed-income investments, like Treasury securities, which could pressure mortgage rates to go higher. December tends to be a strong month for stocks, which means December could also be a month for rising mortgage rates.

Courtesy of Jessica Regan.

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