Photographer: Patrick T. Fallon/Bloomberg

These Charts Will Tell You Where the Housing Market Is Headed This Year

A pending interest-rate rise is overshadowed by other housing challenges

The Federal Reserve is preparing to raise its benchmark interest rate for the first time since 2006. Yet the gradually healing housing industry — one of the biggest beneficiaries of rock-bottom borrowing costs in this economic recovery — isn't panicking. 

Because policy makers have signaled they will raise their key rate slowly and incrementally, potential buyers are less likely to rush into the market ahead of the first rate hike, said Columbus, Ohio-based Nationwide Insurance Chief Economist David Berson. Besides, mortgage rates, while no longer at a record low, are still half their historical average in Freddie Mac data back to April 1971.

So if not the Fed's looming interest rate move, then what? Here are a few things analysts say we should be watching instead to determine how the housing market will perform this year.  

1. Inventory

To entice customers, offer variety. Even the most eager buyer would be restrained by a lack of inventory, said Svenja Gudell, senior director of economic research at Seattle-based real-estate website Zillow Group Inc. These days the options are limited.

Inventories in March notched their first year-over-year drop since December 2013, according to data compiled by Seattle-based property-data provider Redfin Corp.:

And here is where an increase in interest rates could make matters worse, said Gudell. Further down the road — say, in a year or more — owners with mortgages at currently low rates will think twice about putting their homes on the market, for fear of racking up higher borrowing costs in new mortgages. This is known as "lock-in effect."

While that may prompt more spending on home renovations as homeowners sit tight, less churn also could mean a hobbled housing market, she said. 

2. Prices

What's worse, inventory probably won't balloon until prices surge to prompt owners who are still underwater to put their houses up for sale. Housing costs already are rapidly nearing their level in December 2007, when the last downturn began: 

3. Affordability for first-time buyers

Americans hunting for more affordable homes have had an especially hard time, with credit constraints and scant supply holding back sales at the lower end. First-time buyers, too, have accounted for an unusually weak share of overall purchases during the expansion. They need to return to increase the churn:

4. Credit availability

Lenders have been slow to ease mortgage requirements after the popping of the housing bubble helped trigger the last recession. Mortgage Bankers Association data that take into account factors such as credit scores and loan-to-value ratios illustrate the lingering challenge for those with less-than-pristine borrowing histories:

Lawrence Yun, chief economist at the National Association of Realtors in Washington, said he's hopeful for a turnaround. Government lenders are reducing down payment requirements and private banks see a "profit motive" in boosting mortgage availability, he said.

"Any negative impact of rising rates I think will be easily compensated by an opening up in the credit box," said Yun.

5. Wages

Bigger paychecks will be a key ingredient for stronger home sales even as mortgage rates rise, said Anika Khan, a Wells Fargo Securities economist in Charlotte, North Carolina.

"What could move the needle is stronger wage growth — a lagging indicator," said Khan. "Let's say it lags a year — then we could trickle into 2016 and actually see a little bit more activity happen."

Stay tuned for the next peek at how the housing market is doing. March data on existing-home sales will be released Wednesday from NAR, and new-home sales from the Commerce Department on Thursday.

(An earlier version of this story misspelled the name of Zillow's Gudell.)

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