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Pending home sales pull back in June as rates rise

A U.S. flag decorates a for-sale sign at a home in the Capitol Hill neighborhood of Washington, August 21, 2012. REUTERS/Jonathan Ernst
A U.S. flag decorates a for-sale sign at a home in the Capitol Hill neighborhood of Washington, August 21, 2012. REUTERS/Jonathan Ernst

By Paige Gance

WASHINGTON (Reuters) - Contracts to purchase previously owned U.S. homes fell in June, retreating from a more than six-year high and suggesting rising mortgage rates were starting to dampen home sales.

The National Association of Realtors said on Monday its Pending Homes Sales Index, based on contracts signed last month, decreased 0.4 percent to 110.9. May's index was revised down to 111.3, the highest since December 2006, from a previously reported 112.3.

Economists polled by Reuters had expected signed contracts, which become sales after a month or two, to fall 1.0 percent.

"This latest move down in pending home sales may reflect some weakening in activity related to the recent increase in mortgage rates as well as limited available inventory for sale," Daniel Silver, an economist at JPMorgan in New York, said in a research note.

Contracts were up in the West, where they reached the highest level since November 2009, but down in the Midwest and South. The index for the Northeast was unchanged.

Compared to a year earlier, contracts were up 10.9 percent.

Stocks <.SPX> and bonds mostly ignored the report but the dollar trimmed losses against the yen.

The housing market has been a bright spot in the economy, providing a buffer from fiscal austerity in Washington. Existing home sales fell in June, but selling prices hit a five-year high in a sign the housing recovery was still on track. In addition, new home sales rose last month.

However, an index from the Mortgage Bankers Association that measures loan applications for home purchases has declined 10 percent since early May, a sign of the toll higher borrowing costs are starting to take.

Rates on 30-year fixed rate mortgages have climbed about a percentage point since early May on expectations the Federal Reserve may begin scaling back its bond-buying stimulus program as early as September.

In May, as mortgage costs started to rise, pending home sales jumped 5.8 percent.

"We had such an outsize gain in May, and I think what we saw was a good number of people that were trying to beat the punch and pull the trigger on buying that home before mortgage rates rose even further," said Sam Bullard, senior economist at Wells Fargo in Charlotte, North Carolina.

The inventory of homes on the market has also begun to climb, but it remains short of the six months' supply economists say represents a good balance between supply and demand.

Economists believe a steadily improving jobs market and an anticipated pickup in economic growth should help keep the housing market recovery moving forward, despite higher rates.

"Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully," Fed Chairman Ben Bernanke told Congress this month.

Fed policy-makers meet on Tuesday and Wednesday but are not expected to make any change to the $85-billion-per-month bond-buying program. Economists, however, expect the Fed to trim its purchases at its next meeting in September, with an eye toward shuttering the stimulus program by the middle of next year.

(Reporting by Paige Gance; Editing by Andrea Ricci and James Dalgleish)

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