Housing sector as Atlas, carrying economy

The Federal Reserve's interest-rate cuts have kept builders and homebuyers busy.

Someone ought to give Federal Reserve Chairman Alan Greenspan a nail gun and a carpenter's apron.

Since the beginning of the year, the Fed chief has been instrumental in helping the housing industry by cutting interest rates. And the buoyant housing market - together with vibrant consumer spending - has kept the US economy out of a recession.

Now, with the Fed lowering rates another quarter of a percentage point on Tuesday, economists are hoping that this vital economic sector can keep going until the rest of the economy starts operating again.

"Our concern is that if the economy continues to deteriorate, people will step back," says Dave Seiders, chief economist for the National Association of Homebuilders in Washington. "We're relying on the tax bill to get the economy back up, but if that does not happen, I have to believe housing would start to lose ground."

So far, that isn't the case. In July, new housing construction hit a strong 1.672 million units - a "big-time number," says Mr. Seiders. He says his conversations with builders indicate August is also going to be a good month, helped in part by mortgage rates below 7 percent.

That's how things are going for builder Colwell Homes in Medfield, Mass., which in July had a lot of inquiries and took offers from prospective buyers on four properties. Two are under construction, which is considered fairly high for a builder who averages 10 homes a year in the $700,000 to $900,000 range.

And Colwell's customers don't seem to be scrimping on amenities. "They're not cutting back. People spend a lot of money on features," says Scott Colwell, who runs the company with his father.

The interest-rate cuts have certainly helped out for lower-priced homes, says Randy Ladd, a sales manager for Taylor-Morley Homes in the St. Louis area. "A friend of mine is selling villas in [the outer suburb of] O'Fallon, and she's in the $150,000 price range. She's selling houses like crazy," says Mr. Ladd, who sells more-expensive homes. "Our numbers have been about the same as last year."

Why housing is strong

Economists give several reasons for the strength in housing. A lot of homes built in the 1940s and '50s are being torn down, says Ken Goldstein of the Conference Board, a business-research organization based in New York. In their place are new homes, all wired for the digital age. "Part of who is moving in are the baby boomers, who have seen their kids all leave," he says.

Homeowners have also viewed housing as a good investment, particularly when the stock market is dormant. For the past year and a half, housing prices have risen between 6 and 7 percent per year. In the first quarter of this year, that jumped to 8.8 percent. "It has certainly revived the investment demand for homeownership," says Seiders.

But the trend has undergone some changes. For example, Mr. Colwell says his client profile has changed from nouveau riche dotcomers to more traditional moneymakers. "Our customer base has gone back to the way it used to be - doctors, lawyers," he says.

Although mortgage rates have not dropped as much as short-term rates, which are the province of the Federal Reserve, they are down somewhat this year. Long-term rates are more subject to the expectations for inflation and the psychology of the long-term bond market. But economist Lyle Gramley, a former governor of the Federal Reserve, says consumers have leapt at the opportunity to refinance their homes. "As housing prices are up a lot, we're getting much larger cash-outs, and this has helped consumers to improve their balance sheets," he says.

In a cash-out, a consumer takes advantage of the higher price of a home by taking on a higher mortgage. For example, if a consumer has $150,000 left to pay on a mortgage, but the house has appreciated in value to $200,000, he or she can refinance with a $175,000 loan. This preserves some equity in the house, but also provides funds to buy a new car or pay off debt.

"No one knows for sure the volume, but there are estimates that $50 to $60 billion has been pulled out of the market this

year," says Mr. Gramley.

Some economists believe these good times for consumers may end later this year. "The cyclical forces of a weak economy will start to catch up with the housing market," says Scott Grannis, a principal at Western Asset Management in Pasadena, Calif. "Another shoe has yet to drop: the consumer retrenching," he says.

Better pace ahead?

However, Mr. Goldstein says this won't hurt the housing industry, which can barely keep up with demand. "We'll be moving to a more sustainable pace," he says.

This could help consumers like Ken Simmons of West Chester, Pa. Back in April, he asked four builders for bids to add a family room, rebuild his deck, and remodel his kitchen. So far, he has only received two bids - and one estimated the cost of the work to be higher than the value of the house. "Obviously," says Mr. Simmons, "that builder doesn't need work too much."

Samar Farah in Boston and Craig Savoye in St. Louis contributed to this report.

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