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Housing's head of steam
Will higher rates douse the red-hot housing market any time soon? Don't count on it.
July 25, 2003: 3:16 PM EDT
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Ho-hum -- another month, another record for U.S. home sales. The housing market's been so strong for so long that it may be difficult to imagine the day when it falls back to earth.

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With mortgage rates on the rise again, that day would seem to be coming soon -- but many economists think housing's still got some gas in its tank, enough to carry it through the year.

The National Association of Realtors (NAR) said sales of pre-owned, or "existing" homes, the biggest segment of the housing market, dipped a bit in June but remained near record levels.

And the Commerce Department said sales of new homes -- only about one-seventh of the total market -- surged to a record-setting pace in June.

But June also saw interest rates dip to a new low -- 5.21 percent for a 30-year mortgage, according to lender Freddie Mac. Since then, rate-inflating comments by Federal Reserve officials, along with rising optimism of an economic rebound, have sent rates soaring.

The yield on the 10-year Treasury note, which is closely tied to mortgage rates, has jumped a full percentage point since bottoming on June 13, and the 30-year mortgage rate has climbed to 5.94 percent.

Some economists are worried the surge will finally slow down the housing market, which has been critical to the broader economy during an anemic recovery from the 2001 recession.

Higher home prices helped homeowners feel wealthier, shaking off the effects of a long bear market in stocks. Home sales and construction helped support sales of furniture, appliances, lawn-care and other home necessities.

"If rates continue to rise -- and that is a realistic prospect if we keep getting good economic news -- the market could come under pressure," said Joel Naroff, president and chief economist at Naroff Economic Advisors in Holland, Pa.

Of course, if rates are rising simply because the economy is doing better, then those improving sectors of the economy might be strong enough to pick up the slack from housing.

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And many economists feel the housing market still has enough momentum that, like a charging freight train, it will take some time to slow down.

"Home-buying is not a snap decision -- people mentally prepare for it and search for homes, and this is a three-to-four-month process," said NAR senior economist Lawrence Yun. "Plus, even with the rise in mortgage rates, they're still below last year's figure and still close to 45-year lows."

Yun said the NAR expects home sales to remain strong this year and fall off maybe 2 percent in 2004 -- still an extraordinarily strong number. If 5.83 million existing homes are sold this year -- that's the pace of sales right now -- then a 2-percent drop-off in 2004 will still result in sales of 5.71 million homes, the second-highest amount in history.

Of course, that forecast assumes mortgage rates don't rocket into the stratosphere.

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Doug Duncan, chief economist at the Mortgage Bankers Association, said the recent run-up in rates has exceeded the MBA's expectations -- they thought the 30-year mortgage would average about 5.7 percent this year -- and that a jump to an 8-percent mortgage rate in the next 12 months would start to cause real problems for the market.

"Eight percent is an important level because we got down to 5 percent," Duncan said. "A 300 basis-point move is a lot for the market to swallow." One percent equals 100 basis points.

Still, Duncan said such a jump is highly unlikely -- the 10-year Treasury yield would have to surge dramatically in the next year, and he's not even sure its current level of 4.15 percent is warranted by the economic picture.

In any event, if the economy were growing like gangbusters, then even a mortgage rate as high as 7 percent would probably not be enough to halt the housing market.

"In the long run, demographics are the driver of sales in the presence of moderate mortgage rates, and 7 percent is still a pretty good rate," Duncan said. "People forget -- the last time rates were over 8 percent was in May 2000, and that wasn't a bad year for sales."  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.