Falling Mortgage Rates Help Push New Home Sales to Two-Year High
Sales of new homes climbed 4.4% in January to their highest level in two years as the housing industry enjoyed a boom spurred by falling mortgage interest rates, the government reported Wednesday.
The Commerce Department said new single-family homes were sold at a seasonally adjusted annual rate of 753,000 units in January, the best monthly showing since December, 1983. The January sales pace was 20% higher than a year ago and was just one of a number of signals pointing to a sharp revival in housing activity.
Construction of new homes has jumped by 26% since November. Starts hit an annual rate of 2.09 million units in January while sales of existing single-family homes rose to 3.3 million units, their highest level in seven years.
The surge in activity has come from sizable declines in mortgage interest rates in recent months. Lenders in some parts of the country are offering fixed-rate mortgages below 10%, something that hasn’t happened since October, 1978.
Further Declines Seen
“It is clear that the housing markets are opening up to many buyers who have been waiting for years for interest rates to fall to affordable levels,” said Richard Peach, vice president of forecasting at the National Assn. of Realtors. “Declining mortgage rates have helped make this the best time to buy a home since 1978.”
Many economists forecast that mortgage rates will fall even further in coming months.
The Federal Home Loan Bank Board said Wednesday that effective interest rates for fixed-rate mortgages dropped to 11.34% in early February from 11.45% in January and 13.48% a year ago.
A weekly survey done by the Federal Home Loan Mortgage Corp. put fixed-rate mortgages at 10.51% last week, the lowest that they have been since April, 1979. This survey, unlike the bank board report, does not include any fees, or “points,” that lenders add on to the quoted mortgage rate.
The Veterans Administration last Friday cut its home loan rate a full percentage point to 9.5%, down substantially from a high of 17.5% in 1981.
Kenneth Rankin, an economist with Wharton Econometrics, said conventional mortgage rates are likely to fall to about 9.75% by the end of this year, helping to boost sales even further.
Even with the sales gain, prices actually fell last month. The average price of a home dropped 3.7% to $103,000 when compared to December. This was still 4.8% higher than a year earlier.
Prices Likely to Rise Faster
The median price of a new home dipped by 0.3% to $88,900, a level that was 7.8% higher than a year ago.
Peach said home prices are likely to start rising at a faster pace, given the surge in demand. Rising prices could well wipe out any advantage that buyers would receive by waiting for mortgage rates to fall further, he said.
The 4.4% rise in January sales followed gains of 0.3% in December and 12.9% in November.
January sales were up the most in the South--7.9% over the December level. Sales were up 5.4% in the Northeast and 1.7% in the West but fell 6.6% in the Midwest.
Meanwhile, as interest rates for some home mortgages have fallen to single-digit levels for the first time in 7 1/2 years, homeowners are flocking to cut their payments by refinancing mortgages at the lower rates. Some lenders report a tripling of inquiries and requests for refinancing, sparked by the sharp fall in interest rates on traditional fixed-rate mortgages.
“We’ve had craziness here like everyone else,” said Charlie Ferraro, an assistant vice president for mortgage marketing at Bank of New England in Boston, which is offering 30-year and 15-year fixed-rate mortgages at below 10%.
Although individual cases vary because of differing fees charged by lenders for loans, the savings from refinancing can be substantial.
For example, someone holding a 30-year fixed-rate mortgage for $80,000 at 13% would pay $884.96 a month. Refinancing the entire amount at 10% would cut payments to $702.06, a savings of $182.90 a month.
Assuming that closing costs for the refinancing totaled 4%, or $3,200, the homeowner could recoup the expense of refinancing in about a year and a half.
“There’s a big difference between 10.125% and 9.875%,” said Ronald F. Poe, president of the Mortgage Bankers Assn. of America. “There’s bigger than a quarter-point difference psychologically. I think 10 was really the magic number.”
Factory Orders Climb
The initial rate on adjustable-rate mortgages, which usually are offered at 2 or more percentage points below fixed-rate loans, has averaged less than 10% since June, according to the weekly national survey of 1,500 lenders by HSH Associates, a financial publishing firm in Riverdale, N.J.
In another report Wednesday, the Commerce Department said that U.S. factory orders climbed 0.4% in January, as a huge surge in defense orders offset widespread weakness in other areas.
The department said orders for manufactured goods totaled $202.09 billion in January. While it was the third consecutive month that orders have grown, the January advance was pale compared to increases of 2.2% in December and 0.8% in November.
In fact, without a 44.6% spurt in demand for military equipment, total orders would have fallen by 1.2%, the department said.
The big jump in defense orders put demand for military equipment at $10.3 billion, following three months of relatively low orders averaging less than $7 billion per month.
Orders for all durable goods--items expected to last three or more years--rose 1.3% in January following a 3.6% December gain. Eight days ago, the department had estimated the rise in durable goods orders at a much lower 0.4% for January.
Orders in the key category of non-defense capital goods fell by 19.6%, reflecting the decline in civilian aircraft orders. This category is watched for signals that it can give about industry plans to expand and modernize production facilities.
