If Fed Chief Alan Greenspan and other economists are worried that Americans aren't making wise decisions when it comes to housing and financing, some new data indicates that homebuyers can be very prudent. As interest rates rise, homebuyers are continuing to buy, and they're more likely to choose a fixed rate loan and a more affordable home than to stretch into a riskier investment. That kind of "rational exuberance" has kept the real estate market hot even while fall weather cools things down.
Total existing-home sales set a record in the third quarter, with 44 states and the District of Columbia showing higher sales compared to a year ago, according to the National Association of Realtors®. Overall, home sales were up 6.5 percent over third quarter 2004.
The strongest increases in sales weren't in California and Florida as might be expected. They were in Arkansas, where the third-quarter sales activity rose over 32 percent. Utah existing-home sales increased over 26 percent from a year earlier, and Washington state was up by 20.0 percent. Fourteen other states recorded double-digit sales gains, and four states showed declines, and data for two states, Louisiana and Mississippi, was incomplete.
Higher sales go hand in hand with higher prices. Out of 147 metropolitan statistical areas, 69 areas studied by the N.A.R. showed double-digit annual price increases, with only six metros exhibiting small price declines.
The national median existing single-family home price was $215,900 in the third quarter, up nearly 15 percent from the third quarter of 2004 when the median price was $188,200. The strongest price increase in the nation was in the Phoenix-Mesa-Scottsdale area of Arizona, where the third quarter price of $268,000 rose over 55 percent from a year earlier. Next was Orlando, Fla., at $261,300, up over 44 percent from the third quarter of 2004. Cape Coral-Fort Meyers, Fla., with a third quarter median price of $277,600, was up over 42 percent in the last year.
David Lereah, NAR's chief economist, says the gains are merely the result of more buyers than sellers in the market.
Sales lead price gains. When sales improve, prices rise.
Economists have expressed concern that housing prices are rising in part because of easy money from lenders, but recent reports suggest that homebuyers are going for the sure thing -- the fixed-rate mortgage, which could mean that they plan to stay put for a while.
Fixed-rate mortgages are at their highest rates in more than two years, suggesting to borrowers that the era of great finance deals is coming to an end. Both U.S. Bancorp and IndyMac Bancorp told the Wall Street Journal that the percentage of fixed-rate loans they are originating have increased 8 to 9 percent in loan volume.
Applications for loans are starting their seasonal slowdown, which could calm interest rates even further, and housing sales are also predicted to slow, with rising inventories over the winter. Refinancing is slowing with homeowners pulling as much as $204 billion out of their homes in 2005. By 2006, with more than $185 billion in adjustable loans scheduled to reset to fixed rates, homeowners are expected to pull less than $114 billion out of their homes, according to Bear Stearns. Less money circulating in the economy is expected to bring interest rates down again.
Realty Times agrees with N.A.R. economist Lereah when he says he believes that housing is at a peak for the current cycle. We do, too, but we also believe that housing sales will ramp up again in the spring after a short winter's nap.
