How rising interest rates will hit consumers

This surge may continue for a few more months. Mr. Seiders estimates it takes about four to five months from the time ground is broken for a new home to the time the welcome mat is placed outside the front door.

Despite this strength, Seiders expects the new-home market to start to slow down in the second half of the year - probably by about 6 percent. "It's not a big move," he contends, "and we're historically at a good level."

Yet any housing slowdown will have a spillover effect on the economy. Last year, more than 10 percent of the nation's 3.1 percent growth rate was directly related to housing. It's currently still running about that rate - about double its historic contribution to the economy.

Housing is even more important in terms of its indirect contribution. When individuals buy a new home, they often buy new furniture, appliances, carpeting, lighting, even azalea trees. When all is totaled, 20 percent of the US economy may be related to housing, estimates Seiders.

Home values have been growing even faster than builders are pouring new footings. In some parts of the nation, such as California, New York City, Boston, and Washington, houses are up as much as 25 percent over the past year. Last week, the National Association of Realtors reported that nationally, prices of existing homes in May were up 10 percent over than May 2003.

The sharp rise has made some question whether the sector is "the next bubble." But in a study released last week, the Federal Reserve Bank of New York says it doesn't look like a bubble about to burst. Although some markets may be overbought, that's not the case on a national basis, say senior economist Jonathan McCarthy and vice president Richard Peach.

"We're not suggesting there are not pockets of exclusive areas where prices are up dramatically and they can come down dramatically," says Mr. Peach in an interview. "The main point we want to make is that the measures that people use to support the view that there is a bubble are flawed."

For example, Peach says the large drop in nominal interest rates in the past few years has meant that home buyers can afford larger mortgages. In 1990, the average nominal interest rate of a 30-year fixed-rate loan was more than 10 percent; today, it is closer to 6 percent. "Combined with a 50 percent increase in median family income, there's been a 130 percent increase in the mortgage a family can qualify for," he says. "Over the same period, home prices are up 72 percent - so it's a wonder [that] home prices have not risen [even] more under the circumstances."

Peach also disputes the view that an increasing number of home buyers using adjustable-rate mortgages during a time of rising interest rates constitutes a threat to the economy. "We have seen this before in the beginning of 1987 when there was a fairly big run-up in rates in a short period of time, and the world did not come to an end."

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