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Heady Days For Housing


Economic Trends

HEADY DAYS FOR HOUSING

A surprising bounty's many causes

It wasn't supposed to happen. With fixed mortgage rates up as much as 150 basis points since the start of the year, most economists were expecting the bellwether housing industry to slow significantly by late summer. Instead, sales of new and existing homes have remained strong, and housing starts surged in August to an annual rate of 1.53 million units, their highest level in more than two years, with single-family starts up a sharp 8.3%.

One clear reason for housing's surprising resilience is that consumers are feeling a lot more secure about their economic situations. Low inflation and low unemployment, strong hiring gains, a buoyant stock market, and a pickup in wage growth have pushed consumer confidence to its highest levels in the current expansion. Home-purchase intentions in the Conference Board's monthly consumer surveys have been running well above last year's levels.

At the same time, more than a third of home buyers are now using adjustable-rate rather than fixed-rate mortgages, compared to just 14% as recently as February. And at 6% or so, adjustable rates are running two-and-a-half percentage points below conventional mortgage rates--substantially cutting the current cost of home purchases.

The real sleeper in the housing picture, though, may be the sharp pickup in home prices. Economist William V. Sullivan Jr. of Dean Witter Reynolds Inc. points out that both existing- and new-home prices are posting their strongest increases since the 1980s, with existing-home prices recently running as much as 7% above year-earlier levels.

While rising prices might deter some sales, the prospect of price appreciation can also spur housing investment. This is particularly true in metropolitan areas in California and the Northeast, where property values are now rising after falling in the late 1980s and early 1990s. In Boston, for example, house prices are actually up 9% from a year ago.

Economist Mark Zandi of Regional Financial Associates estimates that homebuilding, directly and via supplier and construction-dependent industries such as lumber, furnishings, and appliances, may currently be accounting for as much as a fourth of current economic growth. And that's not counting the wealth-enhancing impact of rising home values on consumer spending. Unless the housing sector slows soon, he warns, economic growth is likely to remain uncomfortably high.BY GENE KORETZReturn to top

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WHY U.S. CASH FLOWS ABROAD

Payouts to foreign investors mount

While national attention has focused on the federal deficit and debt, America's foreign debt is also growing exponentially. The government reports that the U.S. has moved from being a net creditor with respect to other nations in the mid-1980s to owing them some $814 billion in 1995. And this year, DRI/McGraw-Hill estimates, the foreign debt level will rise to $1 trillion, or 13.4% of gross domestic product.

Although U.S. direct investment overseas still exceeds foreign ownership of U.S. factories and businesses, foreign ownership of U.S. securities--stocks, bonds, and the like--far outweighs U.S. holdings of similar foreign assets. And foreigners already receive more income in the form of U.S. dividends, interest, and profits than Americans glean from their overseas investments.

As long as the U.S. continues to run a trade deficit, the size of that deficit plus rising net-income flows to foreigners will keep the nation's foreign debt on an upward course.BY GENE KORETZReturn to top


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