How can 2014 home sales outpace 2013?

One research firm thinks it knows

Existing home sales stalled out at the end of 2013, but Paul Diggle, property economist at Capital Economics, says the decline in existing home sales will prove temporary.

Capital Economics notes the number of existing home sales fell 9.1% between August and November to 4.9 million annualized.

"That meant that, for the first time since mid-2011, existing home sales were running slightly below the level seen a year ago. What’s more, judging by the latest set of pending home sales figures, which tend to lead existing home sales by a month or two, existing home sales may have dropped to 4.8m annualized in December,” Diggle says.

"Given that existing home sales make up more than 90% of all home sales, a key question is whether the current slump will prove temporary or permanent."

Diggle says the drop in existing home sales was triggered by the rise in mortgage interest rates over the mid-part of last year. Average 30-year mortgage interest rates rose from 3.7% in April to 4.7% in September and they have mostly remained in that territory.

"Alongside the rise in house prices, higher rates have reduced mortgage affordability and taken a toll on consumers’ confidence in the housing recovery," Diggle says. "The share of respondents to Fannie Mae’s monthly housing survey who think that now is a good time to buy a home dropped from 76% in May to 64% in November, while the NAR’s index of buyer traffic declined from 72 to 53 between April and October."

"The bottom line is that the improvement in housing market activity during 2014 will be considerably weaker than the improvement during 2013 – even taking account of the soft end to last year. But we do at least expect a further improvement in activity," Diggle notes.

“We stand by the forecasts … that existing home sales will increase from 5.1 million in 2013 to 5.2 million in 2014. But the expected 100,000 pickup in existing home sales would be far below the 400,000 pickup between 2012 and 2013."

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