PENDING HOME SALES
Prices & Availability
A 3% Inflation Rate
Will A;ect Sales
The most recent U.S. inflation rate has clocked in
at a manageable 2 percent. This level is not inherently worrisome for consumers. But pressure is
building, and rates are expected to trend higher.
Apartment rents and home owner equivalency
rents (a fuzzy hypothetical figure of what home
owners would pay to rent out their homes) are
both increasing more than 2 percent annually and
could soon approach 3 percent. Persistent housing
shortages and falling rental vacancy rates are behind the rising rates.
Because housing costs make up the largest part
of the consumer price index, these increases are
significant. But other sectors contribute to inflationary pressures, too. Medical costs, which have
been rising more gradually in recent years (they
should record their slowest price gain in 40 years
in 2013) are likely to head back up. Energy costs
are also rising sharply. Crude oil prices were up 19
percent from a year ago, while natural gas prices
jumped 23 percent.
The only component of the CPI that is falling
pertains to electronic devices. And even those
drops are not absolute price declines. (If a new
model sells for the same price as the old model,
statisticians compute it as a decrease though consumers get no price break.)
So if inflation spikes from 2 percent to 3 percent, does this create significant hardship for consumers or the overall economy? More than you
might think. That’s because as inflation ticks up,
so do mortgage rates. If inflation rises to 3 percent
by 2015, which is more likely than not, mortgage
rates will have to rise by a full percentage point
to compensate lenders for the loss in purchasing power of the money returned to them. A one
percentage point increase on a $200,000 loan
will increase the monthly payment by $167. On a
$500,000 loan, the payment rises by $417.
So yes, inflation matters and it will accelerate
in 2014 and 2015. Factor this trend into your business planning, and be prepared to discuss it with
your clients. W
Learn what the latest
economic indicators mean for
the real estate industry.
Lawrence Yun is chief
economist of the NATIONAL
ASSOCIATION OF REALTORS®.
Existing-home sales is a seasonally adjusted annual rate, which is
the actual rate of sales for the month, multiplied by 12 and adjusted
for seasonal sales di;erences. Pending home sales is an index that
measures housing contract activity. An index of 100 is equal to the
level of activity during 2001, the benchmark year. Price indicates
the national median. Inventory measures the number of existing
homes on the market at the end of the month. Buyer and seller
tra;c, current conditions, six-month expectations, and time
on market derive from a monthly REALTOR® Confidence Index. Results for July are based on 3,342 responses to 6,000 surveys sent to
large and small real estate o;ces. The survey asks practitioners to
indicate whether conditions are strong (100 points), moderate (50),
or weak (0). Some data may be revised from previous issues.
Interest rate hikes and rising home prices are taking a toll
on sales. July saw a monthly dip in pending sales nationally,
though the rate was above one-year-ago figures for the 27th
straight month. Higher prices are a;ecting the availability of
FHA financing in some areas. And some areas are seeing higher
mortgage and flood insurance premiums. On the plus side,
households are jumping into the market to buy before rates and
prices rise further. All trend lines are from July 2012 to July 2013.
APPRECIATION TO COOL
Median expected change among REALTORS®
for home prices in the next 12 months.
Source: NAR Research