Real estate’s still in a slump, as yesterday’s report on June sales of existing homes reminds. The National Association of Realtors reported that sales of single-family homes tumbled 3.8% last month to an annualized rate of 5.75 million units–the lowest in almost five years.
More weakness may be coming, predicted Thomas Higgins, chief economist at money manager Payden & Rygel, in a research note sent to clients yesterday. He reasoned that the recent jump in mortgage rates will keep the pressure on sales in the coming months. He explained that a high correlation (77%) between mortgage rates and a two-month lag on existing home sales suggest as much, as per his chart below.
Source: Payden & Rygel
“Between May 11 and July 13, the rate on a 30-year fixed-rate mortgage surged from 6.15% to 6.75%,” Higgins wrote. “As the chart above shows, a rise in mortgage rates tends to impact existing home sales with a two month lag.” As a result, he warned that existing home sales “could see another down leg in July and August.”
This line of thinking throws a potential wrench into the machine of optimism, which of late has espoused the idea that the worst of real estate’s ills had passed. The sector isn’t necessarily poised for boom or even modest rebound. But if the market would simply stop bleeding, the flat-lining would go a long way toward boosting the economy in the second half of 2007 into 2008.