.jpg)
Home sales activity experienced an upswing during the past few months. Getting more specific, existing home sales increased from 4.4 million in November to 4.6 million in December at the seasonally adjusted annual rate, and December's supply of existing houses on the market decreased from 7.2 to 6.2.
One major factor is the real mortgage interest rate. Despite the fact that the nominal rate has dropped to below 4 percent, one might make the case that what matters is the real mortgage rate, which takes house price expectations into account. For instance, if a would-be homebuyer anticipates house prices to drop by another 5 percent in the next year, then the homebuyer’s real mortgage rate is 9 percent—not 4 percent.
The second crucial factor affecting current home sales is lending standards. The Senior Loan Officer Opinion Survey (SLOOS) shows that the majority of banks reported tightening standards for mortgage loans. The latest SLOOS indicates that today’s mortgage credit supply is much tighter than before the housing bubble. And thanks to the current market condition in mortgage financing and the ongoing legal and regulatory indecision, lending standards are unlikely to loosen in the near future.
Bottom line: There won’t be a home sales increase unless aspiring homebuyers can secure financing. And even with the current record low nominal mortgage interest rate, households' expectation of future home price appreciation remains depressed, which leads to the conclusion that the real mortgage rate is still elevated. It’s likely that a rise in home sales will be a slow, gradual process thanks to these tight lending standards.
Other articles you might enjoy: