WASHINGTON May 19 A rise in mortgage rates
could explain much of the weakness in U.S. home resales and
further increases in the cost of home loans could dampen the
recovery, a Federal Reserve Bank of San Francisco economist said
in a paper published on Monday.
Senior economist John Krainer said other factors, including
uncertainty about the economy's prospects and investors
retreating because of high house prices, were also dragging down
existing home sales.
"Changes in fundamentals such as rising mortgage rates can
account for much of the sluggishness in existing home sales over
the past year," Krainer said.
Home resales have slowed sharply since the second half of
2013, declining in seven of the eight months through March. They
peaked in July.
Mortgage rates started trending higher last May in
anticipation of the Federal Reserve scaling back its monthly
bond-purchasing program. The 30-year fixed rate increased by
about a percentage point from last May, when it was 3.54
percent, to its most recent peak of 4.49 percent in September.
It has since dropped to average about 4.34 percent in April.
"This drop-off in sales seems more pronounced in some
markets where investors had previously been active, though these
markets have been slowing for the past several years, even
before mortgage rates began to rise," said Krainer.
Investors were the main drivers of the housing recovery.
They bought properties, most of which were in foreclosure after
their owners failed to keep up with mortgage repayments, and
converted them into rentals.
Home sales were also slowing even in more distressed
markets, Krainer said, adding that evidence suggested investors
might be pulling back because of rising housing valuations.
"Further increases in future mortgage rates could dampen the
recovery in existing home sales," he said.
But high mortgage rates are not the only culprit behind the
housing slowdown. Housing starts, which Krainer said were
significantly low for this stage of the recovery, suggested
other factors were at play.
"Prospective home buyers may have impaired access to credit,
they may be under water on their mortgages or have low home
equity, or they may simply be reluctant to make large spending
decisions when economic prospects are still somewhat uncertain,"
"As the moderate recovery continues and these factors begin
to dissipate, all forms of housing market activity, including
existing home sales, should post more solid growth."
(Reporting by Lucia Mutikani; Editing by Jan Paschal)