Last minute buyers rushed to get their signatures on the dotted line before the federal homebuyer tax credit expired last Friday.  According to the Mortgage Bankers Association, purchase mortgage applications rose for the second straight week to their highest levels since October 2009 in the week ending April 23rd which evidences the surge in activity.  Sales activity will likely slow in the coming months, but by how much will be determined by several factors.

An eventual increase in mortgage rates could have the biggest impact on housing demand as the year goes on. While the tax credit surely brought buyers off the sidelines, it has been the continually low mortgage rates which have made home purchase increasingly affordable as prices dropped.  If rates start to creep higher in the second half of the year, it will be a substantial impediment for a sustained recovery in housing.

Secondly, the economy, and particularly employment growth, needs to show further signs of improvement.  Unemployment remains at uncomfortably high levels and demand will be limited until homebuyers feel confident about their employment and financial situation.

Home prices and inventory levels need to stabilize in the wake of the removal of government housing stimulus.  Price stabilization is necessary to maintain confidence for homebuyers and current homeowners alike, as most home buyers have to sell their existing homes prior to buying a new one.  Inventory has been in consistent decline, but permits and starts have increased recently in order to capitalize on the homebuyer tax credit, low interest rate environment, and spring home-buying season.  Inventory will need to remain at manageable levels so that if demand fades then it won’t create too much oversupply and generate additional drag on prices.

The tax credit expired in a relatively quiet manner this time which leads one to assume that the housing market is on more solid footing.  When the original homebuyer tax credit was set to expire at the end of last November, there was much lobbying from Realtor groups and industry participants to extend the tax credit because housing needed more support at the time.  While there were some word of a possible extension, those rumors were laid to rest as the tax credit expired last Friday.  The housing market will need carry forward without government propping up demand, and only now will we be able to gauge the true health of the market.

The Economy
Advance estimates for first quarter gross domestic product showed the economy continued to expand albeit at a slower pace then it finished last year.  The advance first quarter GDP figure showed the economy grew 3.2% compared to the final fourth quarter figure of 5.6% growth.  This marks the third straight quarter in which the U.S. economy has expanded and further evidences the economy has fully recovered and exited recession.  Consumer spending jumped but it wasn’t enough to offset slower business and government spending last quarter.  Imports also grew faster than exports which slowed economic growth.

The consumer confidence index increased to a reading of 57.9 in April from a revised March figure of 52.3. This is the second straight month that the consumer confidence index has increased while the index has posted increases in five out of the past six months. This is also the highest reading for the index since September 2008. The consumer confidence index is up noticeably from the same year-ago period when the index stood at 40.8.  Both the present situation and expectations indexes increased as well last month.

Housing Market
National average mortgage rates declined slightly from the previous week to 5.06% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on April 29th.  Rates have remained steady at current levels over the past three weeks.  In the week ending April 23rd, the MBA’s seasonally-adjusted purchase index increased 7.41% from the previous week and was up 2.5% compared to the same time last year.  This is the second straight week that purchase applications have increased and the highest the purchase index has been since October 2009.  n However, overall mortgage application activity declined 2.9% over the past week due to a drop in refinance activity.

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