Housing Market Probably Brightened in May: U.S. Economy Preview

Housing Market Probably Brightened in May
The projected pace of existing-home sales in May, up from a 4.97 million annual rate in April, would be the fastest since a tax credit for first-time homebuyers was first due to expire in November 2009. Photographer: Andrew Harrer/Bloomberg

Sales of existing homes probably rose in May to a three-year high and builders began work on more new properties, extending gains in residential real estate that are boosting the U.S. expansion, economists said before reports this week.

Purchases of previously owned houses climbed 0.6 percent to a 5 million annualized rate, the strongest since November 2009, according to the median forecast of economists surveyed by Bloomberg ahead of a June 20 report from the National Association of Realtors. Housing starts may have increased to a 950,000 pace last month.

Americans with access to credit have taken advantage of cheaper borrowing costs, spurring construction and optimism among companies such as Plum Creek Timber Co. Federal Reserve officials meeting this week will weigh how long to continue with record monetary stimulus as a recent surge in mortgage rates, if sustained, threatens to slow housing’s progress.

“The housing market continues to improve, and builders are seeing demand recover significantly,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. Still, “we have conditions where unemployment remains high and inflation is actually decelerating, and I think that gives the Federal Reserve room to remain engaged.”

The Fed has pressed on with $85 billion a month in asset purchases, including $40 billion in mortgage-backed securities, to bolster growth and reduce the jobless rate. Chairman Ben S. Bernanke said on May 22 that the central bank could scale back stimulus efforts should the economy show sustained improvement.

Mortgage Rates

Speculation that the Fed is getting closer to paring its bond buying has caused mortgage rates to increase. The average rate on a 30-year fixed loan jumped to a 14-month high of almost 4 percent last week from a four-month low of 3.35 percent in early May, according to data from Freddie Mac.

“You may see some slowing in the pace of homebuilding and home sales, depending on how far the rates go up,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. In the short term, the pickup in borrowing costs may encourage more Americans to buy a home before they appreciate further, he said. “You’re seeing improved consumer demand, you’re seeing prices improving and that encourages people on the fence.”

The projected pace of existing-home sales in May, up from a 4.97 million annual rate in April, would be the fastest since a tax credit for first-time homebuyers was first due to expire in November 2009. It would be the third-highest since July 2007, five months before the start of the last recession.

Home Construction

Limited inventory has held back sales, the group has said. Homebuilders are stepping in to fill the void with new properties, data from the Commerce Department are projected to show on June 18.

Builder shares have outperformed the broader market in the past year. The Standard & Poor’s Supercomposite Homebuilding Index, which includes Lennar Corp. and PulteGroup Inc., has climbed 60.3 percent in the last 12 months compared with a 22.4 percent gain the S&P 500.

A measure of homebuilder sentiment may have climbed in June to a four-month high. The National Association of Home Builders/Wells Fargo index of confidence tomorrow is projected to increase to 45 from 44 in May, according to the Bloomberg survey median.

Building materials suppliers including Plum Creek Timber are benefiting from the housing pickup.

‘Fundamental Improvements’

“We’re going to see some fundamental improvements in our business just by the nature of the economic improvement, particularly with housing and the repair and remodel segment which uses lots of wood,” Rick R. Holley, the company’s chief executive officer, said in a June 6 presentation. “Most important thing is we see housing and demand continue to go in the right direction.”

Strength in the housing market has helped make up for weakness in manufacturing. Two regional factory reports from the Federal Reserve banks of New York and Philadelphia are projected to show little signs of progress in the industry.

                        Bloomberg Survey

                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
Empire Manu. Index        6/17      June      -1.4      0.0
NAHB Housing Index        6/17      June       44        45
CPI  MOM%                 6/18      May      -0.4%      0.2%
Core CPI MOM%             6/18      May       0.1%      0.2%
CPI  YOY%                 6/18      May       1.1%      1.4%
Core CPI YOY%             6/18      May       1.7%      1.7%
Core CPI SA Index         6/18      May     232.879   233.255
CPI NSA Index             6/18      May     232.531   233.066
Housing Starts ,000’s     6/18      May       853       950
Housing Starts MOM%       6/18      May      -16.5%    11.4%
Building Permits ,000’s   6/18      May       1005      976
Building Permits MOM%     6/18      May      12.9%     -2.9%
Initial Claims ,000’s     6/20     15-Jun     334       340
Cont. Claims ,000’s       6/20     8-Jun      2973      2950
Markit Manu. PMI          6/20      June      52.3      52.5
Exist Homes Mlns          6/20      May       4.97      5.00
Exist Homes MOM%          6/20      May       0.6%      0.6%
Philly Fed Index          6/20      June      -5.2      -2.0
LEI  MOM%                 6/20      May       0.6%      0.2%
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