Home prices continue their upward ascent. According to the Federal Housing Finance Agency, the governmental body in charge of Fannie Mae and Freddie Mac, nationwide home prices increased by 0.7% in May compared to April and by 7.3% over the same month last year. As you can see in the chart below, it was the 16th consecutive month that home prices improved after a long spell in which they declined.
There are two primary catalysts behind this trend. First, mortgage rates, although recently on the uptick, remain exceptionally cheap from a historical perspective. Freddie Mac reported at the end of last week that the average rate on a 30-year fixed-rate mortgage is currently 4.37%. By comparison, as I noted here, the average rate for the same type of loan since 1971 is 8.61%.
And second, there's a widely acknowledged lack of supply in both the new and existing home markets. The National Association of Realtors said yesterday that the inventory of existing homes equates to a 5.2-month supply and remains 7.6% below a year ago. As its chief economist Lawrence Yun noted, "Inventory conditions will continue to broadly favor sellers and contribute to above-normal price growth."
Catalysts aside, there's no question that an increase in home prices will help the economy. CoreLogic (NYSE: CLGX) recently estimated that 19.8% of homeowners are underwater on their mortgages. Zillow (NASDAQ: Z) puts the figure at 25.4%.
"These homeowners owe more on their mortgage than what their house is currently worth, which means in order to sell it, they would have to come up with additional money at the time of closing to pay off their loan," Zillow's senior economist Svenja Gudell explained last month. "Since many homeowners are not in a position to do that, they cannot list their homes, greatly restricting the supply on the market."
In addition to this much-needed buoyancy, the increase in prices is also spurring homebuilders into action. At the end of June, Lennar Corp (NYSE: LEN), the nation's third largest homebuilder, reported that orders for new homes in the second quarter climbed by 27% over the same time period last year. And similar trends have been observed at D.R. Horton (NYSE: DHI) and PulteGroup (NYSE: PHM), both of which report earnings later this week -- for charts of these two companies' quarterly home sales, click here and here, respectively.
The net result is that the housing market continues to improve.
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