In the month of May, the purchase of new homes in the U.S. reached its highest level in the last seven years, signaling that the housing market is recovering.
Sales of new single-family houses beat analysts’ forecasts, up 2.2% during the month of May. Stronger employment and higher disposable income were credited for the rise. (Source: U.S. Department of Housing and Urban Development, June 23, 2015.)
Some analysts speculate the boom in home sales is a sign of ultra-cheap lending spurred on by the Federal Reserve. A historic low interest rate is still supporting home buyers; the average rate on a 30-year fixed mortgage was four percent in the week ended June 19. Yet the rate has been below the average six percent in the last five years of the economic expansion that ended in December 2007, when the housing market boomed. (Source: Bank of America, last accessed June 23, 2015.)
The strong number is an indication that the U.S. economy is turning around, which could have important implications for monetary policy going forward. At their June meeting, the Federal Reserve decided to keep the benchmark interest rate unchanged. Moreover, they signaled that as the U.S. economy is growing and the labor market is strengthening. That could mean the central bank will be raising interest rates later this year.
Investors remain cautious that the Federal Reserve will increase the federal funds rate this year. The fact that mortgage rates are tied to the federal funds rate’s consequently higher interest rates could take the wind out of the housing market’s sails—zapping a home buyer’s purchasing power. Hence, industry experts are worried housing demand could slow down.