Spiking mortgage rates strangled sales in 2013

by Ryan Smith20 May 2014
Spiking mortgage rates bore the brunt of responsibility for the marked slowdown in existing home sales in the second half of 2013, according to new data.

A report by the San Francisco Federal Reserve Bank found that home sales last year peaked at 4.75 million units in July and have been falling ever since.

“The fact that home sales in different parts of the country peaked and fell together suggests that some common underlying factors were at play,” wrote John Krainer, a chief economist at the San Francisco Fed. “One such factor that could account for the decline in home sales is rising mortgage interest rates.”

Interest rates started spiking in May of last year as financial market participants became convinced that the Fed would soon taper its bond purchases. Mortgage rates in particular saw a dramatic spike, rising by more than a full percentage point.

“Higher mortgage rates generally have a direct dampening effect on home sales, as buyers face constraints on the size of loans they can secure and on loan payments relative to their incomes,” Krainer wrote. “Since individual incomes likely did not rise over this short period, and house prices continued to grow in most regions, the rise in mortgage rates was expected to have an unambiguous negative impact on sales.”

Krainer wrote that although mortgage rates would continue to be an important driver in home sales, other factors were also putting a damper on the market.

“Further increases in future mortgage rates could dampen the recovery in existing home sales,” he wrote. “It should be noted, however, that many other indicators of housing market activity—including housing starts and new home construction—remain significantly below what history would lead us to expect for this stage of the recovery. Thus, some other factors may be holding back home sales. For example, prospective homebuyers may have impaired access to credit, they may be underwater on their mortgages or have low home equity, or they may simply be reluctant to make large spending decisions when economic prospects are still somewhat uncertain.”
 

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