The number of US homebuyers who signed purchase contracts shot up 6.1% in May, blowing away market expectations. A number of factors may be at work given that home sales are still below 2013’s levels. Economic weakness felt earlier this year was blamed on a harsh winter, so the rebound may be partially rooted in improving economic activity as buyers and sellers thaw out. But given the often local nature of real estate, weather can’t explain everything. Higher mortgage rates in the first quarter also held the market back. As rates decreased over the past few months, buyers became more aggressive.
The decrease in overall sales relative to last year is also partially attributable to fewer distressed sales and declining investor participation in the market for single family homes and condominiums. With fewer distressed sales, inventory is responding more naturally to buyer demand. Despite watching homes in many coastal neighborhoods return to pre-recession peaks, some sellers remain on the sidelines fearful of another sharp drop in prices and mindful of stringent lender guidelines. The limited activity taking place between buyers and sellers reflects mostly rising prices, albeit at a seemingly slower pace this year. What happens if sellers gain confidence and lender guidelines ease depends a lot on the direction of interest rates.
Assuming the economy continues to grow without too many upside or downside surprises, the pace of real estate gains depends on where interest rates move from here and how quickly. The Fed should keep benchmark rates near zero long after they turn out the light on the QE bond buying program. Should they raise interest rates too quickly fearing inflation, they could stifle economic activity and scare home buyers away. If the Fed doesn’t act fast enough to extinguish broad signs of inflation, mortgage rates could spike. Janet Yellen’s ability to balance inflation, economic growth and employment as well as Ben Bernanke holds the key to the real estate market’s fate moving forward.