Home sales provide another positive data point for Fed

June 22, 2015 01:25 PM

U.S. home resales surged to a 5-1/2-year high in May as first-time buyers stepped into the market, the latest indication that housing and overall economic activity were gathering steam in the second quarter.

The National Association of Realtors said on Monday existing home sales increased 5.1% to an annual rate of 5.35 million units, the highest level since November 2009.

That left sales this year on track for their strongest performance since 2007.

"It suggests that the U.S. housing market recovery is back on track after the missteps earlier this year. We expect this upbeat tone in the housing recovery to continue as the favorable domestic fundamentals begin to reassert themselves," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Last month's increase unwound April's surprise drop in purchases, which economists had dismissed as a blip given that forward-looking indicators on home sales, including mortgage applications, had been fairly strong during that period.

The Realtors group revised April's sales pace up to 5.09 million units from the previously reported 5.04 million units. Economists polled by Reuters had forecast home resales rising to a 5.26 million-unit pace last month.

First-time buyers accounted for 32% of transactions, the largest share since September 2012. Still, the share remains well below the 40% to 45% that economists and realtors say is required for a robust housing market.

May's sturdy home sales report added to last week's data on building permits in portraying an upbeat picture of the housing market. It joined strong retail sales, consumer sentiment and employment data reports in suggesting a building up of momentum in the economy after output contracted at the start of the year.

The strengthening economic outlook keeps the Federal Reserve on course to raise interest rates later this year.

U.S. stocks extended gains on the housing data. Market sentiment was also buoyed by hopes of a deal to avert a debt default by Greece. The housing index was up 0.76%. The dollar was little changed against a basket of currencies, while prices for U.S. Treasury debt fell.

Strong demand for accommodation, especially among young adults as they find employment, is giving the housing market a steady pulse after a lackluster performance over the last few years. Tightening labor market conditions are also starting to spur stronger wage growth, boosting demand for housing.

Economists hope that housing will strengthen enough to take up some of the slack from manufacturing, which is being stymied by the lingering effects of a strong dollar and spending cuts in the energy sector, and support the economy this year.

"The continued resilience in existing home sales gives further support to the notion that much of the Q1 weakness in resales was weather-related," said Derek Lindsey, an analyst at BNP Paribas in New York.

While the stock of homes for sales is improving, supply remains fairly tight and continues to limit choice for potential buyers. Last month, the inventory of unsold homes on the market increased 3.2% from April to 2.29 million units. Supply was up only 1.8% from a year ago.

At May's sales pace, it would take 5.1 months to clear houses from the market, down from 5.2 months in April. A supply of six months is viewed as a healthy balance between supply and demand.

With supply well below what it was at the height of the housing market boom in 2006, the median price for a previously owned home increased 7.9% from a year ago to $228,700. House prices this year could exceed the peak set in 2006, the Realtors group said.

While the strong house price gains could reduce affordability, they are raising equity for homeowners, encouraging some to put their houses on the market.

Realtors and economists say insufficient equity has been forcing potential sellers to stay longer in their homes. A survey by the Realtors association showed homeowners on average staying in their homes for 10 years instead of the typical seven years.


(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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