Falling Mortgage Rates and Slowing Home Prices Boost U.S. Consumers

Despite slowing home sales in early 2014, economists are expecting a strong home buying market in 2015 as a combination of decelerating home price growth and falling mortgage rates make homes more affordable for Americans.

Despite slowing home sales in early 2014, economists are expecting a strong home buying market in 2015 as a combination of decelerating home price growth and falling mortgage rates make homes more affordable for Americans.

According to the S&P Case-Shiller index, home prices in August slowed to a 5.6% increase year-over-year, a rapid deceleration from the 6.7% rate of growth in the prior month and the lowest rate of growth since November 2012. Earlier in the week, the Black Knight Financial Services study of home prices showed a 4.9% increase in August, down from 5.1% growth in July. According to Black Knight, August saw the 12th consecutive month of home price growth deceleration, after peaking in September 2013.

Sluggish Home Sales

A slowdown in home price growth may be a result of sluggish home sales growth, according to a recent report by the National Association of Realtors. The NAR saw pending home sales increase 0.3% in September, just 1% above the prior year. In the Midwest, home sales actually fell 4%, while the northeast, south, and west all posted modest gains. Sales growth has come near stagnation throughout 2014.

NAR chief economist Lawrence Yun believes an increase in supply that is not being met by rising demand. “Housing supply for existing homes was up in September 6 percent from a year ago, which is preventing prices from rising at the accelerated clip seen earlier this year,” said Yun. However, Yun added that “spectacularly low mortgage rates” could help demand rise in the near term.

Consumer Confidence Beats Expectations

Slowing home price gains and cheap credit may be helping consumer confidence, which reached its highest level since 2007 in October.

According to the Conference Board, consumer confidence rose to 94.5 in October, up from 89.0 in September.  That was much better than analysts had expected. Conference Board Director of Economic Indicators Lynn Franco said that improvements in the job market and business conditions were making consumers more confident, which could cause greater spending and income gains in the future. “Looking ahead, consumers have regained confidence in the short-term outlook for the economy and labor market, and are more optimistic about their future earnings potential. With the holiday season around the corner, this boost in confidence should be a welcome sign for retailers,” said Franco.

Fewer consumers believe business conditions will worsen and more believe it will improve, while job growth is expected by more consumers than in the prior month. The upbeat results are leading some economists to argue that the United States might be experiencing “good deflation,” in which lower energy prices spur greater aggregate demand, which could help increase economic activity including home sales.

Throughout 2014, consumer confidence has improved but economic activity growth has remained muted. Economists expect more activity, particularly around housing, to boost confidence even further in 2015.