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For several years, economists have unsuccessfully tried to call the top of the white-hot housing market. Each time they've been foiled by unexpected stock market gains that boosted consumer confidence and wealth. But with stocks cooling off since the start of the year and interest-rate hikes coming in bigger increments from the Federal Reserve, the experts may finally get it right.
There are signs now that housing activity, a key engine of the economy, may be starting to slow. According to the Mortgage Bankers Assn., applications for new mortgages -- a key leading indicator of housing activity -- have fallen 11% in the past year. Applications for building permits dropped in April for the third straight month. And home resales, which make up 85% of all homes sold, fell in the first quarter compared with the previous three months. "We're starting to get embryonic signs that the Fed's rate hikes are starting to work," says Jason Trennert, managing director at International Strategy & Investment Group Inc., a New York economic consultant.
Still, it may take some time before the rate hikes bite hard. Why? While costlier mortgages eventually will put a damper on the sizzling housing market, in the short run the effect is the opposite as prospective homeowners rush to buy before rates move higher. Says Harry R. Marro, a Bay Village (Ohio) realtor: "As rates go up, [my] business gets busier." Indeed, despite several rate bumps from the Fed, new-home sales actually rose in the first quarter.
NO REVERSAL.
Case in point: Daniel G. Hack had been musing about buying a second home for years. The 40-year-old Chicagoan wasn't in a particular rush until last year, when the Fed began raising interest rates. So Hack, a principal in stock brokerage firm Wayne Hummer Investments LLC, zeroed in on a $440,000 Georgian home facing Lake Michigan in Sheridan Beach, Ind., and locked in a 7.5% mortgage before rates blipped up again. "There had been a string of quarter-point hikes," says Hack. "I saw nothing indicating a reversal of that trend was imminent."
Once the rush-in buyers are satiated, the slowdown will come. Housing experts expect the market to come off the record levels of recent years but remain healthy. David Seiders, chief economist at the National Association of Home Builders, looks for single-family home sales to fall 4.2% this year, to 869,000 units. While that's down from '99, it's still better than '98's performance.
Seiders contends that some homebuilders would welcome a breather. Years of strong demand have left them struggling with worker and material shortages, leading to backlogs of homes on order. In addition, Seiders says, builders "appreciate the danger that the economy is overheating. In the past, the association has bashed the Fed, but we haven't done that lately." Builders may have another reason to think a little cooling-off period would be good news: a dwindling number of lots for all those dream houses. Bob Halso, president of homebuilder Pulte Home Corp. in Bloomfield Hills, Mich., says developers have broken ground so fast in so many new places it currently takes twice as long to get lots approved as it did three years ago.
"WAKE-UP CALL."
Few experts expect the housing market to really fall apart with both personal income and consumer confidence at such high levels. Of course, if mortgage rates soar to what would seem like a stratospheric 10% -- which few expect -- housing activity would see an even sharper slowdown. "When you hit double-digit interest rates, folks feel rates are really high," says Terry White, chief financial officer of Newmark Homes Corp., a builder based in Sugar Land, Tex. "They start to feel they have missed out on the best rates and are more willing to sit on the sidelines." The 30-year fixed mortgage rate is currently at 8.64%, the highest in more than five years and 1 1/2 percentage points higher than just a year ago.
With signs of a slowdown still in the early stages, the Fed isn't likely to abandon its tightening campaign anytime soon. Unless a broader economic deceleration emerges, the likely result is another series of upward ratcheting to encourage further slowing -- without strangulation. The Fed's half-point hike on May 16 serves as "a real wake-up call" to the industry, says Fred Flick, vice-president for economic research at the National Association of Realtors.
Likewise, Robert I. Toll, chairman and CEO of Toll Brothers Inc., a Huntingdon Valley (Pa.) homebuilder, says: "The Fed will finally convince the market that it means business. It will slow demand." If that prediction turns out to be true, it will be the first time in years that housing experts wind up being right.
Laura Cohn in Washington, with Ann Therese Palmer in Chicago and Stephanie Anderson Forest in Dallas EDITED BY BETH BELTON
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