What's Slowing Down the Housing Sector?

04/22/2014 12:00 am EST

Focus: REAL ESTATE

Jim Jubak

Founder and Editor, JubakPicks.com

Recent numbers show that sales of previously owned homes fell in March for the third consecutive month, but MoneyShow's Jim Jubak thinks it is still too early to determine the root of the slowdown.

If the housing sector is still supposed to be the lead engine for the US economy, that engine seems to be slowing down. The Federal Reserve’s $85 billion a month in purchases of Treasuries and mortgage-backed securities was intended to stimulate the economy by keeping mortgage rates low.

It’s certainly too soon to blame a slowdown in housing on the Fed’s decision to reduce its monthly asset purchases, but a slowdown is indeed what we’re seeing. And that’s not good news for an economy already facing challenges on job creation, inflation, and economic growth rates.

The numbers that came out at the end of April show that sales of previously owned homes fell in March for a third consecutive month. Closings dropped 0.2% to a 4.59 million annual rate. That’s the lowest level since July 2012, the National Association of Realtors reported. Purchases were down 8.5% year over year before seasonal adjustments.

Housing prices climbed 6.9% in February from February 2013. That would be good news—except that the 6.9% increase is the smallest gain in a year.

It’s not clear what’s at the root of the slowdown. Exceptionally cold weather may have led to a decline in listings over the winter—which may have tightened supply and kept buyers on the sidelines because of higher prices. (On the other hand, the number of houses for sale at the end of March climbed to 1.99 million compared to 1.93 million in March 2013. That inventory amounts to a 5.2-month supply; at the end of February, inventory came to a 5-month supply.) The average rate for a 30-year fixed mortgage fell to a two-month low of 4.27% for the week that ended on April 17. (On the other hand, a year ago, the 30-year fixed rate averaged 3.41%, according to Freddie Mac.)

These figures certainly explain the dismal numbers on mortgage originations being reported by banks such as Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase (JPM). In response, those three banks have reduced headcount in their mortgage banking units.

If the problem is on the supply side, it doesn‘t look like it will get fixed in the near future. Building permits, an indicator of the pace of future housing construction, fell 2.4% in March.

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