Why Aren’t Home Sales More Vigorous?

June 17, 2011 (Chris Moore)

With mortgage rates near record lows and sinking home prices in the first quarter of this year combining to make home buying the most affordable in years, why aren’t home sales more vigorous? According to Freddie Mac’s June 2011 Economic Outlook report, the reasons are many, but a brighter future is on its way.

Part of the reason cited by Freddie Mac is that consumers are currently a worried group. The waning economic situation and the bombardment of bad economic news has worn on consumers and has caused them to be cautious when considering big ticket items, like cars and homes.

Another reason is the concern from small businesses about the vitality of future economic demand for their products. When small businesses loose confidence in the economy they become hesitant to add workers to their payrolls.

One measurement of businesses' view of future economic confidence is the National Federation of Independent Businesses’ economic confidence index, which declined for the third consecutive month in May and remains at levels reflecting a bearish near-term outlook.

Unemployment is near the top of any list of what concerns consumers the most. Net job creation in May tumbled to 54,000 after several months of encouraging gains and the unemployment rate has increased for the last two months.

First time unemployment claims have been back over the 400,000 level since the beginning of April and for most economists that’s a sign of economic contraction. Yesterday’s report was no exception as 414,000 new jobless claims were filed the previous week.

Falling prices in the first quarter gave potential home buyers a reason NOT to buy a home as they sat on the sidelines waiting for clearer signs that home values had reached bottom before jumping into the market.

And severe weather, earthquakes and tsunami’s caused supply chain interruptions reducing employment gains, though Freddie Mac feels there should be a reversal of this trend in the coming months.

But there is a brighter future down the road according to Freddie Mac, as signs of a recovery in the housing market begin to emerge.

More robust economic growth is expected during the second half of the year supported by the Federal Reserve's accommodative economic policies which should translate into continued low mortgage interest rates and with home prices showing signs of stabilizing over the last couple months, the result should translate into more home sales.

Existing home sales during the first four months of the year were up about 5 percent, which is inline with the projected increase in 2011 home sales over 2010, and delinquencies have been dropping though foreclosure inventories are swollen.

The rental sector has performed well as the National Multi Housing Council reported that property managers in most local markets have found a tightening in rental markets and greater availability of equity and debt financing, and released a relatively upbeat Market Tightness Index of 90.

Frank Nothaft, chief economist of Freddie Mac, stated, “Even though near-term concerns over income and sales growth are restraining consumer spending, business hiring, and new building, there have been a number of positive signs in the economy that growth will continue and is likely to accelerate in the second half of this year. And while parts of the housing industry remain weak, the rental market has clearly strengthened and homes sales are above last year’s pace. Look for a gradual but substantive improvement in housing activity in the coming year.”

Tags: Freddie Mac, home sales, economic outlook, worried consumers, small businesses, economic confidence, unemployment, falling home prices, jobless claims, economic growth

Source:
Freddie Mac