Existing-Home Sales Probably Declined: U.S. Economy Preview

Purchases of previously-owned homes probably fell in August as mortgage rates at a two-year high began to slow the progress in U.S. residential real estate, economists said before a report this week.

Contract closings fell 2.6 percent to a 5.25 million annualized rate from the highest level since November 2009, according to the median forecast of 62 economists in a Bloomberg survey ahead of National Association of Realtors data due on Sept. 19. Another report is projected to show home construction starts rose in August, reflecting orders in the months preceding the run-up in interest rates.

Rising borrowing costs may temper the pace of the housing rebound that’s been a mainstay of the economy. Federal Reserve policy makers meeting this week will decide whether the expansion and labor market have improved enough to warrant scaling back purchases of government and mortgage securities.

“The recent jump in mortgage costs will moderate the pace of the housing recovery but not derail it,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. “The Fed is likely to go ahead with tapering. Borrowing costs could ease a bit between now and year-end as the market digests the idea that the Fed’s decision is not a tremendously negative event.”

The Federal Open Market Committee, due to meet on Sept. 17-18, will start to trim $85 billion in monthly asset purchases, according to the median estimate in a Bloomberg survey taken this month. Policy makers have pledged they won’t consider raising the federal funds rate, now near zero, as long as unemployment is 6.5 percent or higher and the outlook for inflation doesn’t exceed 2.5 percent.

Builder Shares

Higher mortgage rates are taking a toll on shares of homebuilders. The Standard & Poor’s Supercomposite Homebuilding Index has declined 17.6 percent since the end of April, when borrowing costs began to rise. The S&P 500 has gained 5.7 percent.

The projected decline in existing-home purchases would follow a 6.5 percent increase in July that brought the annualized rate to 5.39 million.

Since Fed Chairman Ben S. Bernanke signaled the central bank may slow its purchases of government and mortgage bonds, the average rate on 30-year home loans has risen more than 1.2 percentage points after hitting a low of 3.35 percent in May, Freddie Mac data show. The rate was at 4.57 percent as of Sept. 12, close to the highest level since July 2011.

Contract Backlogs

The surge in mortgage costs is unlikely to halt the nationwide housing recovery, according to builders including Hovnanian Enterprises Inc. The Red Bank, New Jersey-based company reported a profit for its fiscal third quarter as net contracts climbed 1.8 percent and the contract backlog, an indication of future sales, jumped 18 percent to 2,893 homes.

“We’re confident that any hesitancy our consumers have seen or felt or acted with the higher rates will be a temporary bump in the road to housing recovery,” Chief Executive Officer Ara Hovnanian said on a Sept. 9 conference call with analysts.

Even as borrowing costs slow the pace of progress in the housing market, recent demand for new homes will keep builders busy in coming months at the same time low inventories support gains in prices.

The National Association of Home Builders/Wells Fargo confidence index may have eased to 58 in September from 59 a month earlier, which was the highest since 2005, economists projected ahead of the report due on Sept 17.

Housing Starts

A day later, Commerce Department figures may show housing starts climbed to a 920,000 annualized pace in August from an 896,000 rate the prior month, according to the Bloomberg survey median. Building permits, a gauge of future construction, fell 0.4 percent, economists project the report to show.

As the pace of progress in housing cools, manufacturing is emerging from a slowdown in the first half of 2013. Industrial production grew 0.4 percent in August after stalling in July, according to the median forecast in a Bloomberg survey ahead of Fed data tomorrow. Factory activity in the New York and Philadelphia areas also picked up this month, regional Fed figures may show.

Among other data this week, the Labor Department’s cost of living index may signal tame inflation, while the Conference Board’s leading indicators measure may point to an economy that will continue to expand.

                       Bloomberg Survey
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
Empire Manu. Index        9/16     Sept.      8.2       9.0
Ind. Prod. MOM%           9/16      Aug.      0.0%      0.4%
Manu. Prod. MOM%          9/16      Aug.     -0.1%      0.4%
CPI  MOM%                 9/17      Aug.      0.2%      0.2%
Core CPI MOM%             9/17      Aug.      0.2%      0.2%
NAHB Housing Index        9/17     Sept.       59        58
Housing Starts ,000’s     9/18      Aug.      896       920
Housing Starts MOM%       9/18      Aug.      5.9%      2.7%
Building Permits ,000’s   9/18      Aug.      954       950
Building Permits MOM%     9/18      Aug.      3.9%     -0.4%
Initial Claims ,000’s     9/19     14-Sep     292       330
Philly Fed Index          9/19     Sept.      9.3       10.4
Exist Homes Mlns          9/19      Aug.      5.39      5.25
Exist Homes MOM%          9/19      Aug.      6.5%     -2.6%
LEI  MOM%                 9/19      Aug.      0.6%      0.6%
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