High Prices Pound Housing. MARKETWATCH
RISING interest rates and high housing prices are now starting to pummel the United States housing industry. Sales of new single-family houses dropped 9.4 percent in February, falling to the lowest level in more than a year, the federal government reported last week.Skip to next paragraph
Subscribe Today to the Monitor
According to the National Association of Realtors (NAR), sales of existing homes were also off during February, falling 3.1 percent from January sales. In the Northeast, the drop was dramatic, down 18.3 percent. The only region to show an increase in the sale of existing homes was the West, where sales rose 3.2 percent.
The investment community sees a drop-off in housing sales as often a harbinger of a slowing economy, if not an eventual recession. Moreover, a falloff in home sales can have negative repercussions for such consumer goods as furniture and appliances.
John Tuccillo, chief economist of the NAR in Washington, sees the housing slowdown as the cumulative effect of tighter credit imposed by the Federal Reserve Board. ``We'll see a couple of more months of this, since there is always a lag between the Fed's actions and the impact on consumers,'' he says. ``Housing will get a bit weaker. And interest rates will rise a bit more, probably another half percentage point on fixed-rate mortgages.''
Despite rising interest rates and generally high housing prices that continue to keep many first-time home buyers out of the market altogether, Mr. Tuccillo remains something of an optimist. He believes that overall housing starts, including apartments, will be around 1.46 million this year, down only slightly from 1.49 million units last year. Starts for single-family houses, according to Tuccillo, will be ``a little over a million.'' If that occurs, it would be the seventh consecutive year of 1 million-plus single-family starts.
Tuccillo assumes that interest rates will start to drop later this year and that the economy will avoid a recession.
Barbara Allen, a housing analyst at Prudential-Bache Securities Inc., also says 1989 could be a better year than many expect. She predicts another year of 1 million-plus single-family starts; and she sees a strong year for sale of existing homes (3.75 million resales during 1989, compared with 3.63 million last year).
The key to future home sales, says Ms. Allen, will be job growth, not rising interest rates. And so far job growth remains strong.
As an example, she points to what happened in Texas. In the early 1980s, home sales remained brisk despite historically high interest levels of 16 percent to 17 percent for 30-year fixed-rate mortgages. That was because Texas was booming and jobs were abundant.
By early 1987, mortgage rates had dropped to about 9 percent for a fixed-rate mortgage. Yet the housing market was dead in Texas because of the economic downturn and the lack of job growth.
Allen recommends the stocks of a number of housing-related companies, including K.B. Homes (in the California market), Ryland (in the Mid-Atlantic region and California), J.M. Peters (California), and Universal Development (Arizona).
Could the optimists be proved wrong if interest rates were not to come down? Lawrence Horan, a vice-president and building analyst with Smith Barney, Harris Upham & Co., thinks so. He forecasts total housing starts reaching only about 1.4 million units this year. Single-family housing starts will ``drift below 1 million units by the end of the year,'' he says.
``I think we're in for a rough time for housing this year and even for 1990,'' Mr. Horan says. He notes that Fed chairman Alan Greenspan is calling for ``zero inflation,'' perhaps meaning higher interest rates.