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Is Cold Weather to Blame for a Softening Housing Market?

By Scott Gamm

NEW YORK (MainStreet) Many areas throughout the country have been slammed with debilitating snow and freezing temperatures since the beginning of the year. Aside from flight delays, agitated commuters and strain on city sanitation budgets, the weather put a damper on the housing market.

In January, housing starts fell 16% to a seasonally adjusted annual rate of 880,000, down 2% year-over-year. Mortgage applications have also been on the decline in mid-February, as the Mortgage Bankers Association reports an 8.5% decrease for the week ending February 21, compared to the prior week. This is the lowest level in almost twenty years.

"Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it," said Mike Fratantoni chief economist at the association.

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The S&P/Case-Shiller Home Price Index, which measures home prices of 20 metropolitan cities, rose 0.8% in December, though much of the bad weather began in January.

With cold weather, consumers tend to halt their home search, as the conditions make it difficult to travel to prospective homes. To boot, it can be tough to tell how appealing a house is when it's covered in snow.

"The more important question is how much of an impact can you parse out from what was weather and what was a fundamental housing slowdown," says ITG analyst Steve Blitz.

Blitz agrees weather has caused the housing market to soften, but he's optimistic activity will surge in the spring, when the weather improves.

"Don't take the spring's strength for granted - that's just winter leaving the picture," Blitz adds. "The housing market will eventually settle back, but people may misinterpret the pickup as a sense of the economy's acceleration."

Aside from weather, a more fundamental perspective on the health of the housing market points to interest rates. As the Federal Reserve reduces its monthly stimulus, or tapers, interest rates are expected to rise, which can stifle housing demand, as monthly mortgage payments become more expensive.

However, Blitz doesn't see rising rates threatening the housing recovery, but instead as a sign that conditions are returning to normalcy. "Rates are not rising to levels designed to restrict activity, but levels that reflect activity, since the rates we have had in recent years were too low on purpose by the Fed," he says.

As for what could put more brakes on the housing market, Blitz points to sluggish employment and stagnant wages. "Housing momentum will follow and depend on income and employment," he said. "It won't be similar to 2004-2006 where housing was leading the economy."

Despite winter's heavy hand on housing and concerns of a fundamental slowdown there was a bight spot. Sales of new single-family homes, while a small part of the housing market, rose 9.6% in January to a seasonally adjusted annual rate of 468,000.

- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.

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