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July Existing Home Sales Up

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The National Association of Realtors announced Wednesday, Aug 21, that sales of previously-occupied homes rose in July, achieving the highest level in close to four years.

Existing home sales rose 6.5% sequentially in July to hit a seasonally adjusted annual rate of 5.4 million and grew 17.2% year over year. In fact, the annual pace of $5 million has been reached for three straight months now.

Moreover, July's median home price dipped 0.2% from June but increased almost 14% year over year to $213,500. The median price is just 7.3% below the all-time record of $230,400 reached in Jul 2006. Total existing home inventory also rose 5.6% in the month.

The data clearly showed that the recently rising mortgage rates and increasing home prices have not dampened demand yet.

Last week, data published by the National Association of Home Builders (NAHB), showed that housing starts across the U.S. rose 5.9% in the month of July. Moreover, the association published another data which showed that Wells Fargo Housing Market Index (HMI), known as the homebuilder sentiment index, jumped 3 points to 59 in August from 56 in July. This was the fourth consecutive monthly increase in the index and was also the strongest increase in almost eight years.

With the recent improvement in economic conditions and the housing market in general, mortgage/interest rates are edging upwards to more normalized levels since May 2013. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate has risen from 3.59% on May 23 to 4.40% as of Aug 15. In fact, mortgage interest rates are at the highest level in two years.

This has raised concerns among some analysts. High interest rates dilute the demand for new homes, as mortgage loans become expensive. This lowers a buyer’s purchasing power. Moreover, if the Federal Reserve scales back its current $85 billion bond buyback program and instead adopts a tighter monetary policy, as planned, interest rates could shoot up further. This in turn would lower revenues and profits of for homebuilders.

However, another group of analysts believe that interest rates are still below historical levels despite the recent hike and housing is still very much affordable. Home prices have also started rising with market demand gaining momentum but supply remaining limited (both of existing and new homes).

In fact, this group of analysts believes that rising home prices and thinning home inventories have created a sense of urgency among homebuyers to buy a house before prices or mortgage rates shoot up further.

Rising interest rates notwithstanding, some companies like Lennar Corporation (LEN - Free Report) and KB Home (KBH - Free Report) have witnessed increasing demand in all their housing markets in the past quarter and were able to push pricing further.

However, others showed some concern. D.R. Horton, Inc. (DHI - Free Report) noted at its fiscal third-quarter conference call that the spike in interest rates have slowed orders. Meritage Homes Corp. (MTH - Free Report) , at its second-quarter 2013 conference call, admitted to a little bit of cooling in July due to higher rates, but reported that demand remained stronger than the Jul 2012 levels.

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