Although mortgage rates have soared from historic lows in mid-June, there is little evidence yet of a slowdown in the housing market, long one of the brightest spots in a lackluster economy. But even as the overall economy picks up speed, there is plenty of reason to believe the housing industry is enjoying one final burst of activity before a long-anticipated slowdown.
Housing starts surged in July to their highest rate since 1986, according to a Census Bureau report, surprising forecasters who thought the latest boom had peaked. In another impressive show of the housing industry’s staying power, an index measuring builder confidence rose to its highest level since January 2000 as developers reported an increase in both traffic and sales.
There are several good reasons why housing remains strong even though 30-year mortgage rates have jumped more than one percentage point since mid-June, when they hit their lowest level in 45 years.
For one thing, housing transactions generally take weeks or months to plan and execute, so the impact of the recent increase in rates likely will not show up in construction and sales data for several months. More sensitive weekly data already have shown a slight decline in applications for mortgages to buy homes and a huge drop-off in refinancing activity.
Still, several analysts said the sudden rise in interest rates triggered by a bond market sell-off likely shocked many indecisive buyers into action mode.
“Buyers have been sitting on the fence,” said Gopal Ahluwalia, research vice president at the National Association of Home Builders. “They see rates moving up — they say I better get it now before rates go up more.”
Mortgage rates are still relatively low by historical standards, and although forecasting in this arena is notoriously imprecise, analysts do not expect rates to rise significantly in the foreseeable future. Increasingly it appears the bond market rally that peaked in June was an anomaly, based on an overreaction to concerns about deflation expressed by Federal Reserve Chairman Alan Greenspan and other central bankers.
“I think it would take right now a significantly larger rise than what we’ve seen in mortgage rates to send housing into a tailspin,” said Paul Kasriel, director of economic research at Northern Trust in Chicago. Given the expected economic improvement in the second half of 2003, Kasriel said there could be additional upward pressure on rates late this year, “but not enough to really cause a major implosion of the housing market.”
Kenneth Simonson, chief economist for Associated General Contractors of America, an industry trade group, said the housing sector is probably enjoying a “last burst” of activity, but he expects a “gradual descent” rather than a crash.
He notes that the current inventory of available homes is at about five months’ worth of supply, well below any dangerously high levels. Inventories have fallen to as low as four months in recent years, compared with well over nine-months in the recession of the early 1990s and more than 12 months in the early 1980s.
“We still have good demographics and good income and wealth characteristics for sustaining a good level of home selling,” he said.
The construction industry hardly has been universally strong, Simonson said. The market for apartment rentals has been hit by rising unemployment and the favorable interest rate environment that has allowed more people to buy their own homes, he said. And the market for new non-residential construction, especially factories, warehouses, offices and hotels, has been “absolutely horrendous,” with activity falling by 20 to 44 percent in 2002 and further this year.
“It’s remarkable how bad private, non-residential construction has been,” he said.
Still, the boom in housing construction and renovation, along with government spending on new schools, roads and other facilities, has boosted construction employment by 100,000 workers over the past year, even as the overall economy has lost jobs.
The latest wave of housing construction and sales should help boost overall economic performance, which is expected to be far better than the first half. Banc of America Capital Management, for example, is expecting the economy to grow at a 4.5 percent rate in the current quarter, which would be the best rate since early 2002.
“The economy is getting a jump-start right now with the tax cuts and increasingly accommodative monetary policy,” said Kasriel. “I don’t see how the economy can not grow faster over the next six to nine months.”
The big question, he said, is what happens after that. With the housing sector almost certain to slow down from its breakneck pace, the economy’s future will hinge largely on whether businesses pick up the pace of investment and hiring.