Mortgage rates will rain on this house party

The National Association of Realtors reported Friday that 6.5 million pre-owned homes were sold in January at a seasonally adjusted, annual rate, up from 6.09 million a month earlier and more than the 6.1 million economists had expected.

Other measures suggest that the housing market continues to perform well. On Wednesday, the National Association of Home Builders said its measure of builder sentiment remained high. In his fourth-quarter earnings call on Thursday, Douglas Bauer, chief executive of Trai Point Homes, said demand for builder’s homes “will accelerate once again in 2022.”

The strength in housing comes despite rising interest rates that are making already expensive homes more difficult to afford. According to Freddie Mac, the average rate of 30-year fixed-rate loans for the week ended Thursday was 3.92%, which puts it at its highest level since May 2019. And in one with the Federal Reserve to start raising rates overnight. Attempting to control inflation, long-term interest rates can only be at higher levels.

In fact, housing’s biggest constraint still appears to be supply. Friday’s report on current home sales showed that the market had only 1.6 months of housing inventory, the lowest figure ever. Tri Point said the demand for new homes is outpaced by the supply of new homes in the markets where it operates- a situation that makes it difficult for builders to obtain the required materials.

The forces driving housing demand are powerful. The pandemic has reshaped many Americans’ ideas about housing, and the push toward suburban living has helped establish it. Furthermore, after more than a decade of underbuilding – the result of the housing bust that began in 2005 – there is a paucity of available homes.

But it is too early to conclude that the rate hike is not having any effect. Current home sales figures for Friday reflect sales that closed in January. In many cases they were dubbed earlier, with buyers locking in lower borrowing costs than in the previous month. Moreover, it is a fallow time for home sales—before the seasonal adjustments, there was a big drop in sales in December-January.

Finally, there are some potential signs of weakness. Thursday’s home-building report showed that traffic from potential buyers, while still strong, has slowed down slightly. And the Mortgage Bankers Association’s weekly data on mortgage applications for the purpose of buying a home, which can be admittedly volatile, has softened a bit.

The real test will come in the spring when home sales enter what is usually their strongest period of the year. An easy pandemic and a strong job market set the stage for a decent selling season. But rising rates could make it less good than before.