Why The Housing Market Isn't Doomed To Tumble

Housing data has been very weak in recent months, reeling from the impact of the cold winter and because of elevated mortgage rates. Supply and affordability have also weighed on new home sales.

Economists have been slashing their housing forecasts recently following the deteriorating data.

Even Federal Reserve chair Janet Yellen has expressed concern about the housing recovery as well.

But with the weather warming up and mortgage rates declining, some economists expect the housing recovery to get back on track.

This week we get existing and new home sales data that should show a modest improvement.

Existing home sales are expected to rise 2.2% month-over-month to an annualized pace of 4.69 million. Moreover, the pending home sales index increased modestly in March, and the series leads existing home.

New home sales are expected to rise 10.7% MoM to an annualized pace of 425,000. This comes after a dramatic 14.5% fall the previous month.

A key thing to note is that the mortgage applications purchase index has been trending up since early March. Here's a chart from Jim O'Sullivan, chief economist at High Frequency Economics.

Paul Diggle at Capital Economics also points to the jump in April housing starts, that should "ease fears that the recent soft patch in housing market activity will turn into an extended slowdown." Taking April's data along with the gains we've seen in February and March, Diggle writes that starts are up 26.4% over the past year and "have made up pretty much all of their earlier losses relating to the severe winter weather."

Housing starts are below the 1.5 million level needed to meet demand from household formation and he thinks there is scope for starts to rise more.

Unlike the increasing Wall Street consensus that housing won't contribute as much to GDP growth, Diggle writes that "this suggests that, following negative contributions in the past two quarters, residential investment will be a tailwind for GDP growth again soon."

He also isn't too alarmed by the modest decline in homebuilder confidence. "Previous similar run-ups and subsequent moderations in homebuilder confidence have not signalled the end of recoveries in housing starts," he writes.

And then there's the 0.7% rise in the Fed's measure of closed mortgages - where you can't refinance the loan or renegotiate it. "That partly reflects rising house prices and higher loan-to-value ratios increasing the value of the typical mortgage application, to a record high of $277,500 in April. That's above the peak of $250,000 reached during the boom years," writes Diggle.

And the average FICO credit score of newly approved mortgages was 725 in March, down from 750 a year ago (although it's above the average of 690) - something we previously discussed.

Diggle admits that not all the data has been positive but he thinks the housing market is "bouncing back from its weather- related lull," and "that's consistent with the fundamentals of an undervalued and affordable market, and means that the housing market is unlikely to experience the extended weak period that Yellen fears."