Unusually Low Mortgage Rates Cause Housing Market Boom
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Sales of previously owned homes and condos slipped 0.7 percent in May.
updated 6/23/2005 10:37:31 AM ET 2005-06-23T14:37:31

Sales of existing homes slowed slightly in May but still came in at the second-highest level on record with home prices hitting an all-time high.

Sales of previously owned homes and condominiums edged down 0.7 percent last month, the National Association of Realtors reported Thursday. The small decline left sales at a seasonally adjusted annual rate of 7.13 million units, down only slightly from the 7.18 million sales pace in April, which had been an all time high.

Even with the small drop in sales, home prices moved higher, to an all-time record of $207,000 for the median price, the point where half the homes sold for more and half for less.

The new report was likely to do little to lessen concerns that the housing market in some parts of the country is caught in the grip of a speculative fever similar to the bubble that was created in the stock market in the late 1990s before prices came crashing back to earth.

Federal Reserve Chairman Alan Greenspan, while discounting the possibility of a national housing bubble, has talked of “froth” in local markets that have seen a sizable run-up in prices over the past year. He has also expressed concerns that home buyers are using types of mortgages that allow them to purchase more expensive homes with less of a downpayment, leaving them vulnerable if prices do fall sharply.

David Lereah, chief economist of the Realtors group, said he too was concerned about the reliance on interest-only mortgages and other types of mortgages that are offered with low down payments. Both types of loans would leave borrowers vulnerable if home prices started to slide in areas where price increases have been the greatest.

“I worry about a high level of questionable loans in those bubble areas. That could make those markets more fragile,” Lereah said.

In other economic news, the number of Americans filing new applications for unemployment benefits fell sharply last week, signaling that job growth should remain strong in the months ahead.

The Labor Department reported that new claims for unemployment benefits fell by 20,000 last week to a new total of 314,000.

The improvement in claims was far better than the 3,000 drop that analysts had been expecting and kept the claims level well below 350,000, providing evidence that the labor market remains strong and should support healthy job gains in the months ahead.

The housing market is on track to post another record year in sales of both existing and new homes. Analysts had predicted a slight decline in activity this year after sales of new and existing homes had set records for four straight years.

Major Market Indices

Sales have confounded the exports because mortgage rates have stayed near rock-bottom levels.

Normally mortgage rates and other long-term rates would be rising, reflecting the year-long effort by the Federal Reserve to boost short-term interest rates as a way of keeping inflation under control.

But instead, mortgage rates have fallen for most of this year and financial markets have kept long-term rates low, a development that Greenspan has labled a “connundrum.”

“This market is red hot,” Lereah said. He predicted sales would remain strong through the summer as mortgage rates rise only gradually from near historic lows.

By region of the country, sales were down 3 percent in the Midwest and fell 0.7 percent in the West. Sales were flat in the Northeast and rose by 1.9 percent in the West.

The improvement in jobless claims helped lower the four-week moving claims average to 333,000, down from 335,500 the previous week.

The unemployment rate in May dipped to 5.1 percent, the lowest level in nearly four years, even though American businesses created only 78,000 payroll jobs last month. That was the smallest increase in 21 months and down sharply from a surge of 274,000 jobs in April.

Greenspan told Congress two weeks ago that he believed the economy was on a “reasonably firm footing” with inflation remaining under control and economic growth expected to remain strong in coming months.

Those comments were seen as further evidence that the Federal Reserve, which has raised interest rates eight times over the past year, will boost rates again when policy-makers meet next week and keep raising rates at a gradual pace through the summer and perhaps well into the fall.

The biggest threat to optimistic economic assumptions would be a renewed and sustained surge in oil prices which would jolt consumer and business confidence. Oil prices surged into record territory earlier this week on fears that production will not be sufficient to meet strong global demand in the months ahead.

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