Home prices increased 12.2% in May. That’s the biggest jump since 2006, according to the S&P Case Shiller Home Price Index.
What’s driving the increase? The fact that borrowing costs are still low.
It’s true that the average interest rate on a 30-year mortgage spiked by more than one percentage point over the last two months. (The national average recently stood at 4.61% – up from 3.52% at the beginning of May, according to Bankrate.com.)
Yet as we said before, sub-5% interest rates will hardly deal a deathblow to the recovery.
As Barron’s Gene Epstein writes, “Despite alarms in the media about the crushing effects of the recent jump in interest rates, rates are still on the low side of normal.”
In fact, for almost 40 years (1965 to 2003), the lowest mortgage rates ever got was 5.23%. Did that curb demand? Not one bit.
So we’re not surprised that home prices are still enjoying some upward momentum.
We’re also not surprised that homebuilders are more cheerful than they’ve been in a long, long time. The latest reading from the National Association of Homebuilders (NAHB) sentiment index jumped from 51 to 57 – the highest level in seven and a half years.
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Investors don’t seem to be as enthusiastic, though. Ever since mortgage rates spiked, they’ve run for the exits. And since homebuilders’ sentiment and homebuilding stocks traditionally move in lockstep with one another, it’s setting up one of the biggest divergences in recent history.
As Bespoke Investment Group notes, “Going forward, it will be interesting to see if this recent divergence corrects itself – either by housing stocks picking back up again, or homebuilder sentiment pulling back.”
We’re betting on the former. Especially since there’s still a long way for prices to go. As of May, average home prices across the United States are just back to their spring 2004 levels.