Mortgage Rates Higher, But Americans Are Buying

Housing sales in US plunged in January from an unsustainably high December rate, but analysts are optimistic for the future

NINETEEN Ninety Four could be a record year for home sales. This is despite a sharp drop in January home sales and a recent rise in mortgage rates, analysts say.

The Commerce Department released its latest housing numbers last week, showing a 20.1 percent decline in new home sales, down to 695,000 from 870,000 in December. But January was still a healthy 14 percent higher than one year ago.

``Even with this huge drop ... it's a strong number,'' says David Berson, chief economist at the Federal National Mortgage Association (Fannie Mae). Mr. Berson says that if the year continues at January's rate - more realistic than December's high rate - it will still be a good year.

Several factors account for the record drop between December and January, including snowy weather in the East and Midwest and the Los Angeles earthquake. But ``even if the weather had been reasonable, [sales] would have fallen,'' Mr. Berson says.

Sales were unsustainably high in December as interest rates began to creep upward from a 30-year low of 6.74 percent in October, and people hastened to buy before interest rates rose further, Berson says.

High interest rates

Interest rates for 30-year fixed-rate mortgages rose to 7.51 percent for the week ending March 4, the highest rate since last May. The December average was 7.17 percent; one year ago, the national average was 7.44 percent.

``Frankly, it's a little surprising to see rates hike up as much as they did this week,'' says Robert Van Order, chief economist at the Federal Home Loan Mortgage Company (Freddie Mac). ``We saw numbers on the economy revised upward, reinforcing other recent news about the economy's strength. This led to greater fears of inflation, which led to higher interest rates.''

Fourth-quarter gross domestic product was revised upward last week from 5.9 percent to 7.5 percent.

According to the National Association of Realtors (NAR), previously-owned home sales also dropped in January but were still a 12 percent improvement over last year. Sales were strongest in the West, which posted a 17.5 percent increase in sales of existing homes over last year.

Fannie Mae estimates that home sales will near 1978 levels of 4.8 million units (both new and existing). The NAR predicts sales of existing homes will jump nearly 5 percent over last year to tie the 1978 record.

Spring's bright outlook

With the coming of spring and summer - traditionally the ``prime buying season'' - sales should pick up again, Mr. Van Order says. Barring slowed recovery or increased unemployment, ``it should be a very strong year.'' Because real estate is not as stable as other segments of the economy, Van Order says sales react disproportionately well with a good economy.

Still, he is cautious. While analysts predict economic growth of about 3 percent, ``for coming out of a recession, it's a little on the slow side,'' Van Order says. He says ``we came out much stronger'' after the recession in the early 1980s.

The NAR is more optimistic. ``Despite poor weather and the recent uptick in interest rates, strong demand in the market and some of the best buying conditions in years have enticed many who have been on the fence about buying a home to jump on the purchase side,'' says Robert Elrod, president of NAR.

NAR chief economist John Tuccillo adds that he expects interest rates to ``settle back down'' to 7 percent by the end of the year, after rising in the second quarter. Mr. Tuccillo predicts that moderate economic growth will keep inflation in check and interest rates low.

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