Housing gets a lift from lower interest rates

The National Association of Realtors reported on Thursday that April's existing home sales increased 1.3 percent on a month-over-month basis for the first time this year, and only the second time in the last nine months. The key single-family component also jumped, increasing 0.5 percent for the first gain of the year.

Supply is rushing in to meet this new demand, with 2.29 million units listed -- a nearly 17 percent increase from March.

Will the lift continue?

First, it's important to understand the dynamics behind what just happened. The housing market hit a wall in the middle of 2013 as the Federal Reserve started openly discussing the approaching taper of its ongoing "QE3" bond-buying program. QE3 started in late 2012 with a run rate of $85 billion a month in purchases of mortgage securities and U.S. Treasury bonds, but it's now on track to end completely by October.

The actual tapering didn't start until late 2013, but the chatter started last May and lifted long-term interest rates as bond investors responded to the news. That pushed the yield on 10-year Treasury notes from a low of 1.7 percent late last April to a high of nearly 3 percent in early September.

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Home sales collapsed in response (chart above) along with mortgage activity as buyers balked at the higher cost of money. Existing home sales dropped 13 percent between the peak last July and March of this year.

But after moving briefly over the three percent threshold in December, long-term interest rates have been drifting lower throughout 2014. They touched 2.5 percent earlier this week for the first time since June.

The pessimists chalk this up to a bond market that's nervous about the economy's future after a flat-line performance in the first quarter and signs consumers are losing their verve amid bubbling inflationary pressures. The optimists point to some recent comments from the Federal Reserve that the first short-term interest rate hike won't happen until the back half of 2015, promising to keep overall monetary policy accommodative for some time to come.

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Whatever the cause, buying interest has revived in the housing sector. Helping that has been a slowdown in the growth of the median sale price, which increased 5.2 percent over last year -- the softest year-over-year gain in two years (chart above).

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JPMorgan economist Daniel Silver is looking ahead to next week's report on pending home sales (chart above) for confirmation that conditions in the housing market have turned a corner.

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