Existing home sales are expected to increase modestly in March, with investors driving the gain as they continue to take advantage of low interest rates.
The median estimate of existing home sales by economists surveyed by Bloomberg was a seasonally adjusted 5.01 million, up slightly from 4.98 million a month ago. The last time sales surpassed five million was November 2009, when buyers were first able to take advantage of a temporary tax credit.
The Federal Reserve has kept interest rates extraordinarily low, which has spurred investors to flock to the housing market.
“The yield they get from buying a house and renting it out is really attractive compared to other things like treasury yields, which are very low,” said Yelena Shulyatyeva, US Economist at BNP Paribas. “The low interest rates that dissuade them from putting their money in one place actually makes it worth their while to take out a mortgage on some property and rent it out.”
Pending home sales rose in January, bringing the rate to its highest level since April 2010. There is typically a one to two month lag between signing a contract for a house and closing the deal, meaning the strength of January’s pending sales should be revealed in March’s home sales numbers.
The robust January figures were a reflection of the effect Hurricane Sandy had on the economy.
“Nonresidential construction was really strong at the end of last year because businesses had to replace what Hurricane Sandy destroyed,” said Shulyatyeva. “But going into the beginning of this year, that slowed down. Right when we needed them to, home starts have really picked up. The timing couldn’t be better.”
Housing starts have ramped up to fill the supply gap created by a low inventory of homes on the market. There is currently only a 4.7-month supply of homes, compared to a traditional six or seven month supply. The lack of supply has driven prices up more than ten percent over the last year, the largest gain in seven years.
The increase in home values should serve to make it easier to get a mortgage, which would increase demand and drive prices up further.
“There should be a gradual relaxation of mortgage lending standards,” said Paul Ashworth, chief US economist at Capital Economics. “We expect the banks, especially with prices rising, to be more confident in lending.”
A greater pool of qualified traditional buyers means investors, who have played a large part in the market’s recovery, should see their role in the market decline, which bodes well for the economy.
“Right now the strength in the housing market is being mostly driven by investors. In order to see continued improvement in the long run, it can’t be sustained by them,“ said Shulyatyeva. “People who want to buy and actually live in the house are the ones who buy high value things like furniture, refrigerators, and carpeting. That kind of consumption pushes the economy, so they are the ones who have to pick up the baton from investors.”