Wednesday, 20 November 2013

US Housing Market Makes a Comeback With an Assist From Low Interest Rates

The U.S. housing market, a critical driver of the economic recovery, is finally showing increasing signs of improvement. In many markets throughout the United States, prices are rising, construction crews are finally starting to build again and distressed sales are falling. While most analysts expect home price appreciation to slow in 2014, the gains made over the past two years seem real and sustainable.

Low Interest Rates

First, mortgage interest rates remain historically low, even with the increase in rates since the bottom of Treasury yield last year. The Federal Reserve's aggressive and highly accommodative monetary policy, including the purchases of mortgage-backed securities, set the stage for a revival of the housing market. Lower mortgage rates increased both refinancing and purchase loans, reducing monthly payments, and therefore supporting private consumption and encouraging purchases.

Borrowing rates are still near all-time lows, with a 30-year fixed-rate Freddie Mac mortgage at 4.10 percent for the week of October 31. Refinancing also gave households more spending power as it lowered monthly payments. Low rates are increasing housing demand. There is reason to believe rates will remain at these historic lows, as the Fed has telegraphed to financial markets that they should anticipate low interest rates for as long as it takes to reduce unemployment.

Prices Increase

Second, some markets -- once awash with unsold foreclosures -- have morphed into thriving meccas of bustling sales activity, increasing prices and the scarcity of inventory. Nowhere is this more evident than in the southwest. In Las Vegas, once the poster child of the housing boom and bust, prices are galloping upward at an amazing 27.5 percent, while prices in San Francisco jumped roughly 25 percent year-over-year, according to the Standard & Poor's Case-Shiller 20-city home price index.

Los Angeles and San Diego, two cities where prices fell hard during the bust, have come roaring back too, with prices up sharply at 20.8 percent and 20.4 percent, respectively. Miami, which was hit hard by the foreclosure crisis, is rebounding strongly with new condo towers rising and sales soaring 13.7 percent, largely due to strong demand from Latin American and European buyers. Even the Northeast, where prices barely moved until this year, has shown recent strength.

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