US housing market seen strong enough to handle Fed rate hikes

The US housing market is probably strong enough to stand up against an interest rate hike by the Federal Reserve this year, with stabilising home prices supporting sales, a Reuters poll of top economists showed on Wednesday. Of 22 economists surveyed, all but two said the market could withstand the Fed's expected rate hikes. They pointed to job creation and growing demand for houses from millennials as factors contributing to the market's resilience.
"Rates are very reasonable now, and the signal the Fed will give when they begin raising their key lending rate will push more people into the market," said Rajeev Dhawan, director of the economic forecasting center at Georgia State University. The survey forecast the S&P/Case Shiller composite index of prices in 20 metropolitan areas would rise at an average pace of 5.0 percent this year, unchanged from June's poll. Home prices were seen rising 4.2 percent in 2016, down from 4.5 percent forecast in June, according to the poll.
Economists say home price increases of about 5 percent are just strong enough to raise equity for homeowners to encourage some to put their properties on the market and help address a persistent shortage of houses available for sale. The increase is also not big enough to price out first-time home buyers, economists say. But the economists were evenly divided over whether the home ownership rate, which dropped to a 35-year low in the second quarter, would decline further before rising again.
Data last week showed existing home sales rose to 5.59 million in July, nearing an 8-1/2 year high, and housing starts were at their highest level since October 2007. The poll forecast home resales averaging an annualised 5.40 million-unit pace in the fourth quarter, up from 5.21 million forecast in the June survey. "The recent strength of housing activity suggests the market is well placed to cope with a gradual rise in interest rates," said Capital Economics economist Matthew Pointon. "Rising rates will also be accompanied by an improving labour market and gradually loosening of credit conditions."
Some said potential buyers would try to lock in low rates, but others said staggering student debt would continue to prevent young people from buying homes. "There are no bargains in the market now," said FAO Economics economist Robert Brusca. "Maybe high rents will drive people to buy. But it seems the opposite is true. High house prices make high rents look cheaper." Still, asked to judge whether the US housing market was fairly valued on a scale of one as extremely cheap to 10 as extremely expensive, the median answer was five. Nineteen of 22 economists surveyed said the market was affordable.