Multiple Interest Rate Hikes Send US Home Sales Into a Slide

Home buyers with enough financial clout could get better deals

BECAUSE of the Federal Reserve Board's six interest rate hikes this year, the home real estate market is now a ``buyer's market.'' The buyer has more leverage than the seller. And barring any easing by the Fed - which seems unlikely given the central bank's concern about underlying inflationary pressures - the buyer's market will continue well into 1995, experts say.

The pattern is the same throughout much of the United States: The gradual rise in interest rates has slowed new home sales. Many first time buyers find themselves unable, or unwilling because of the cost, to qualify for mortgage loans because of the higher rates. Pending sales are falling off. Inventories of existing homes are rising.

In central New Jersey, for example, which had been coming out of a severe housing slump during the early 1990s, sales declined sharply in the third quarter ending Sept. 30 (compared with 1993 third-quarter sales). Sales are also down in the New York City area.

``The only thing that would make a difference would be for the Fed to stop beating us over the head,'' with higher rate increases, says Brian Bragg, editor of US Housing Markets, a newsletter published by a subsidiary of the Lomas Financial Group in Dallas.

Mr. Bragg's main concern is that 30-year fixed-rate mortgages will reach 10 percent within the next year. ``Double-digit interest rates represent a very significant psychological hurdle'' for many potential buyers, Bragg says.

Nationally, 30-year rates are now running in the 9 percent to 9.25 percent range and will probably inch up somewhat in the months ahead, says Cynthia Latta, an economist with DRI/McGraw Hill, an economic consulting firm in Lexington, Mass. ``Higher rates are clearly slowing the housing market.'' This will be ``a good year for housing,'' she says, but ``perhaps not quite as good'' as it might have been without the Fed's rate hikes, which began in February.

The mid-Atlantic states were just emerging from a recession when the interest rate hikes hit, taking a heavy toll on home sales. ``The rate hikes have stopped [buyers] in their tracks,'' says John Tuccillo, economist for the National Association of Realtors in Washington.

``The Fed has certainly done it's job,'' Mr. Tuccillo says, in terms of slowing the housing component of the economy. ``People had been feeling very good about themselves and the economy and were buying homes throughout the early months of this year,'' he says. ``But the existing home market really died in October. Over the next few months we're going to see a real slowdown in sales.''

Still, 1994 will turn out to be a good year, he says; in fact, it should wind up as ``the second best year ever,'' for sales of existing homes.

Tuccillo expects sales to reach 3.95 million units in 1994, compared with sales of 4.1 million units during 1978, the real estate industry's last banner year.

But with the slowdown, sales will only reach 3.75 million units in 1995, he projects. Historically, ``that's not bad,'' Tuccillo says; but barring rate hikes, the year could have been far better.

Housing starts are also dropping. For the fourth quarter, ending Dec. 31, seasonally adjusted annual housing starts for all units, including both single-family and multifamily homes, are expected to fall to 1.420 million units, down from 1.475 million units in the third quarter, according to Eric Belsky, an economist with the National Association of Home Builders in Washington. But that still exceeds 1993, when ground was broken for 1.288 million new houses.

The national pattern points to an overall housing slowdown. But some states, where economic growth continues above the national average, are still doing very well.

For example, housing starts and existing home sales are both posting strong gains in Colorado, Nevada, Arizona, Texas, and Florida.

The Rocky Mountain states are benefitting too from an influx of thousands of expatriate Californians who continue to move into the region or shift businesses there, which boosts local housing needs.

The homebuilding/ real estate sector represents between 15 percent and 20 percent of the US gross domestic product, experts note.

stock values are dropping for many publicly traded homebuilders. A new study by housing analysts Lawrence Horan and Mars Bishop of Prudential Securities Inc., in New York, concludes that 5 of 9 home building companies that Prudential follows will not report higher earnings in 1995 than in 1994, because of the current slowdown.

Still, the manufactured housing market - mobile homes and prefabricated homes - looks promising to Prudential, as many would-be buyers find the lower costs of these types of homes attractive.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.