Here’s why housing will survive rising interest rates

First American chief economist says rates won’t devastate housing

The housing recovery will be able to digest the upcoming impact of the rise in interest rates, according to one housing economist.

Mark Fleming, chief economist at First American, commented on the Thursday release of the National Association of Realtors’ existing-home sales numbers saying, “An expected move by the Federal Reserve this fall to raise rates will have a moderating, but not devastating impact on market capacity for existing-home sales.”

He also noted that rising rates are an indication of stronger labor market conditions, which is beneficial to the housing market.

The predictions are based on First American’s proprietary Existing-Home Sales Capacity model, which provides a gauge on whether existing-homes sales are under capacity or over capacity.

For the month of July, the EHS-C seasonally adjusted, annual rate of sales decreased by 23,000, a decrease of 0.4% compared to June and a decrease of 2.5% compared to a year ago. The seasonally adjusted, annualized rate (SAAR) of existing-home sales capacity is up 80.5% from the low point of sales reached in February 2009.

“Labor market conditions and interest rate levels remain favorable to the housing market and these factors are keeping the market capacity for existing-home sales steady, nearing an equilibrium rate just below six million sales,” said Fleming.

“Pent-up supply is being released and existing owners are feeling more confident to place their homes on the market, helping to drive the actual sales level higher and close the gap between market capacity and actual existing-home sales quickly,” he continued,” he continued.  

According to the most recent June existing-home sales report, the median existing-homes sales price rose to $236,400, which exceeded the previous peak median sales price set in July 2006 of $230,400.

However, the ultimate timing of when the Fed will choose to raise rates remains unknown.

Federal Reserve Chair Janet Yellen went on record in July saying, “Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end.”

An article in Bloomberg similarly reported that U.S. home construction would also be okay thanks to its solid foundation from an improving job market and growing household formations.

The article stated:

“Housing is in a real sweet spot, moving higher but not dangerously so,” said Eric Green, head of U.S. economic research at TD Securities in New York, who projected a 1.2 million pace. “The housing market will be strengthening over the second half. The Fed raising rates will not change that.”

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