WASHINGTON | Mon Oct 21, 2013

(Reuters) – U.S. home resales fell in September and prices cooled as higher mortgage rates took the edge off the housing market  recovery.

The National Association of Realtors said on Monday that sales of previously owned homes fell 1.9 percent last month to an annual rate of 5.29 million units. At the same time, the median price rose 11.7 percent in September from a year ago to $199,200. While that was the 10th straight month of double-digit gains, it was the smallest increase since April. “This softening had been expected in response to the increase in mortgage rates that began in May,” said Daniel Silver, an economist at JPMorgan in New York.  The NAR said a combination of high home prices, barely rising salaries and higher mortgage rates was hurting affordability, which hit a five-year low in September according to its gauge. 

Last month’s sales drop adds to other indicators, such as pending contracts to buy previously owned homes and home builders’ confidence, that have suggested a run-up in mortgage rates is starting to slow the housing market recovery.  Interest rates have risen sharply since May on expectations the Federal Reserve would start cutting back on its monthly bond purchases this year, with the 30-year fixed mortgage rate surging nearly a full percentage point. It hit 4.49 percent in September, the highest since July 2011, according to Freddie Mac. The Fed surprised markets last month by sticking to its $85 billion per month bond-buying pace. In doing so, it cited the increase in mortgage rates.

Economists said they expected home resales to decline again in October in part because a 16-day partial government shutdown had hurt consumer confidence and likely delayed the processing of mortgages backed by the Federal Housing Administration.

Despite these headwinds, economists said the housing market recovery remained intact. “The housing market is not faltering, it’s just that the rapid improvement has been stunted,” said Joel Naroff, chief economist at Naroff Economic Advisors. “That is not a terrible thing as many were worried about another bubble being formed. I still think the sector has a long way to go.” While home resales rose 10.7 percent from a year ago, the increase was the smallest in five months. Homes are also not selling as fast as they did in the summer. A home’s median time on the market in September was 50 days. That was up from 43 days in August, but down from more than 70 days a year ago.

First-time buyers accounted for 28 percent of the transactions, far below the 40 percent to 45 percent that economists and real estate professionals view as ideal.  Investors, who have been the main drivers of sales, bought 19 percent of the homes in September, with almost three quarters paying in cash.  But there was a silver lining in the report, with distressed properties – which can depress prices because they typically sell at deep discounts – accounting for only 14 percent of sales last month. That compared to 24 percent a year ago.

The number of unsold homes on the market was unchanged at 2.21 million in September, representing a 5.0 months’ supply.  That compared to 4.9 months’ worth in August. A 6.0 month’s supply is normally considered healthy.  “Higher mortgage rates may simply bring demand closer in line with supply, slowing home price appreciation while leaving the volume of sales relatively unimpaired,” said Guy Berger, an economist at RBS in Stamford, Connecticut.

Reporting by Lucia Mutikani

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