With limited numbers of existing homes coming onto the market, rising sales have led to very tight market conditions, according to a new client note fromCapital Economics.

That has led to a rise in house prices on some measures, although the Case-Shiller index is still lagging behind. 

Existing home sales rose unexpectedly in July, and are now up 16% since the start of the year. And while starts were essentially flat in July, they are up 10% over the same period, and homebuilder confidence is elevated.

The good news comes from the broader economy, says Matthew Pointon, property economist for Capital Economics.

“Second quarter GDP growth turned out to be much stronger than originally estimated, with an upwards revision from 2.3% to 3.7% annualized,” he says. “The reading of 0.6% in the first quarter therefore looks increasingly like a weather-related blip. With the economy gaining momentum, growth should be a respectable 2.5% in the third quarter.”

The August payroll figures painted something  of a mixed picture.

Total employment increased by a mere 173,000 in August, while the unemployment rate edged down to 5.1% because of people dropping out of the workforce, bringing the labor participation rate down to a 38-year low.

The still elevated proportion of involuntary part-time workers and the record low participation rate both suggest that there is still slack left in the labor market, as noted by Anthony Sanders, distinguished professor of finance at George Mason University.

How can jobs added be so good when the civilian labor force only grew at 1.5% since 2009? First, more and more Americans are retiring and dropping out of the labor force,” Sanders says. “Second, discouraged workers have drooped out of the labor force. But the labor dropout rate was high under Bush II as well where the NOT in labor force grew at 14.7% from 2001-2008.

“If I add those that are unemployed to the number that have dropped out of the labor force, we get 65% of people either NOT in the labor force or unemployed as a percentage of the civilian labor force,” he says.

The good news is affordability is being supported by a dip in
mortgage rates, Pointon says.

“The turmoil in stock markets
over the past couple of weeks led to a drop in
10-year Treasury yields, which has fed through
to lower mortgage rates,” he says. “The rate on a 30-year fixed mortgage stood at 4.08% at 
the end of August. But Treasury yields have now started to rise, and mortgage rates are unlikely to fall any further.”

With mortgage rates edging down, and house price growth slowing, mortgage payments as a share of income have stayed more-or-less constant over the past year, at around 16%, Pointon notes.

“While an expected rise in mortgage rates – and return of house price growth – will lead to some increase in the burden of mortgage payments, it will be some time yet before they reach their long-run average of over 20% of median income,” he says.

The impact of lower rates on applications for home purchase was not substantial – in fact they recorded a small 0.9% fall over the month. And the weekly breakdown shows what had looked like a recovery towards the end of the month went into reverse in the first week of September.