Low Rates Fueling Housing Market
Americans looking for clues to the economy’s future may find the answer under their own roofs: As housing goes, economists say, so goes the country.
Month after recent month, as other sectors headed south, the housing market kept setting records. Falling interest rates propelled both sales and prices to new highs. Rising home values made owners feel wealthier and more willing to spend. The boom put hard cash in the pockets of those who rushed to refinance mortgages at rock-bottom rates.
Then came Sept. 11. In the weeks after the terrorist attacks, sales fell, prices wavered and builders became increasingly pessimistic.
Some industry experts are betting the downturn will be relatively brief. They say housing should get its groove back sometime in 2002.
“The fundamentals are still very solid, and we expect a full rebound early next year,” said David Lereah, chief economist for the National Assn. of Realtors. “It will definitely contribute to helping the economy get back on its feet.”
There could be a few rough months between now and then. Sales of existing single-family homes dropped 11.7% nationally in September, the biggest monthly decline in six years. Sales of new homes declined 1.4%.
The median price of existing homes slid nearly 4% to $148,100 from a record $153,700 in August.
Lereah said the outlook is brighter than September’s numbers suggest. Major brokers are reporting a sales rebound in October, he said. This year’s sales are on track to be the second-highest on record.
The price decline was a seasonal fluke, Lereah said, and last month’s median price was still 4.6% higher than the previous September’s.
Cathy McCall is one of the reasons the market has held up as well as it has.
McCall, an Internet marketing consultant in Denver, thought seriously about backing out of a pending $370,000 house purchase contract after the terrorist attacks. She said she felt confident enough about her own future but was worried about the psychological effect of Sept. 11 on others.
“I don’t really believe in rational markets,” McCall said. “I think people reacted and continue to react emotionally, irrationally, illogically. That really makes me nervous because things are affecting the market besides just the law of supply and demand.”
But she decided to go ahead. Ten days after the attacks, she closed on a 70-year-old Tudor in Denver’s historic Park Hill neighborhood. “In the end,” she said, “you have to have someplace to live.”
McCall, who had not owned a home since losing money on a townhouse in the late 1980s, decided to buy after realizing that today’s low interest rates made ownership no more expensive than renting, after taking taxes into account.
Millions of Americans reached similar conclusions as mortgage rates fell to levels nearing those of the late 1960s. Last week, the average rate on 30-year mortgages was 6.64%, according to secondary lender Freddie Mac.
For the interest-sensitive housing sector, low rates are like rocket fuel. Despite problems elsewhere in the economy, demand for new and existing homes surged. Prospective buyers competed for a shrinking inventory of listed homes, pushing prices higher.
Rising home values boosted the net worth of American households, offsetting losses on stock portfolios and shoring up confidence as the economic downturn began taking a toll on jobs and profits.
“The psychological effect is very important,” said Sung Won Sohn, chief economist for Wells Fargo & Co. “When house prices go up, people feel better; therefore, they tend to spend more.”
Although stock ownership has a similar “wealth effect,” it is concentrated at the upper end of the income scale. Even at the height of the tech stock bubble, the median-income household had more of its net worth in real estate than in stocks, economists say.
Federal Reserve Chairman Alan Greenspan has acknowledged that until recently, policymakers did not fully appreciate the powerful effect of rising home values on consumer psychology and behavior.
That’s partly because the current economic cycle is different from earlier ones. Most recessions occur when the Fed boosts rates to cool an overheated economy and keep inflation in check.
“In most business cycles, interest rates go up, not down, and that chokes housing, and then the rest of the economy goes into recession,” said Lereah. “This time around it’s just the opposite. It was manufacturing and technology that went into a recession. Interest rates were low, and housing stayed healthy.”
With inflation of little concern, the Fed was free to cut short-term interest rates. Anticipating what would happen, bond traders began bidding down long-term rates even before the Fed started cutting in January.
In no time, people began lining up to refinance their homes at lower rates. When rates dropped significantly after the Sept. 11 attacks, the refinancing surge became a stampede. Refinance applications reached a record high in early October.
“It’s kind of ironic, when you see other industries taking a hit,” said Michael Jeffers, branch manager for AccuBanc Mortgage in Bethesda, Md. “Our industry has been benefiting from the tragedy. The refinance activity has just been huge.”
When opportunity knocked, Mark Carter threw open the door.
Carter, a 40-year-old farmer and restaurant owner in Okarche, Okla., closed this week on a “cash-out” refinancing that extracted enough equity from his home to pay for the swimming pool he had just built in his backyard. It’s a big pool, “with a great, big waterfall.”
Carter signed the loan papers before Sept. 11, but he said the terrorist attacks only made him more certain he had done the right thing.
“Everybody is kind of holding on to their money, which I think is a mistake,” Carter said. “I think you’re a fool not to go out and live your life. I’m not going to be held hostage by Osama bin Laden.”
Today, for every new mortgage written to finance a home purchase, three existing mortgages are refinanced by homeowners who want to improve their cash flow, reduce their debt or buy something they otherwise couldn’t afford.
Homeowners are expected to refinance a record $870 billion in mortgage debt this year. Refinancings have become an important engine of economic growth, contributing as much to consumer spending this year as actual home purchases.
“The one thing that is different about this re-fi boom is that it’s a cash-out boom,” said Doug Duncan, chief economist for the Mortgage Bankers Assn. of America.
That was not the case during previous cycles when low rates produced high levels of refinancing.
This time, “people immediately started tapping their equity in cash-out refinancings,” Duncan said. “It’s provided a cushioning effect for the economy.”
Analysts say about half of all current refinancings result in cash-outs. Although some of the proceeds are used to pay off nonmortgage debts or make new investments, a significant portion is spent on goods and services that keep people on the job and the economy humming.
Estimates of the effect on consumer spending vary. The Mortgage Bankers Assn. and consulting firm Economy.com have calculated that cash-outs will boost consumption by about $50 billion this year.
That would add about 0.5% to the nation’s gross domestic product, a bigger jolt than the economy got from this fall’s $38 billion in tax rebates, most of which was saved rather than spent.
Ellen Gall, a 53-year-old accountant in the Oklahoma City suburb of Yukon, was more than happy to lend the economy a hand.
Gall closed last week on a refinanced loan that will reduce the payment on her 1,250-square-foot home by about $100. With the savings, she’ll be able to buy a new GMC Suburban or Chevy Tahoe equipped with enough seat belts to let her haul all six grandkids around at the same time.
Gall acknowledged that the Sept. 11 attacks initially gave her pause. “It makes you a little leery,” she said. “I haven’t had a car payment in a while.
“But you know what? We cannot let this stop us from living. I’m thinking, if I go buy a car, I’m helping keep people employed. And I will enjoy it at the same time.”
