Why falling interest rates trigger spurt in home sales

After waiting months for buyers to return, the recession-ravaged housing industry is applauding word that new-home sales jumped 23.7 percent in September.

''We think September is, hopefully, the beginning of a modest upturn in housing,'' said Robert J. Sheehan, director of economic research for the National Association of Home Builders.

The sharp rise in new-home sales, the Commerce Department reported Nov. 2, indicates that lower interest rates may be making consumers feel more confident about spending.

''There is nothing like falling interest rates to bring consumers back into stores and developers' lots,'' says Edward Yardeni, chief economist at Prudential Bache Securities.

But most forecasters say consumer confidence is still far too fragile for individuals to trigger a robust recovery. Economists are relying on consumers eventually to lead an economic upturn by purchasng homes, cars, appliances, and other goods. Prospects for higher business spending are grim given the large amounts of excess production capacity firms already have on hand.

Roughly 42 percent of the household heads contacted by Sindlinger & Co. in its latest weekly survey feel confident about the economy. That is up from 35.2 percent who felt confident at the start of October.

But ''to get a sustained recovery of modest proportions the confidence level must rise to 64 percent,'' says Martin Sikora, Sindlinger vice-president.

A pessimistic view of consumers' buying mood comes from the Conference Board, a business-supported research organization. Its October consumer confidence study, which has not yet been released, will show confidence ''down quite sharply'' for October, says Fabian Linden, director of consumer research. The drop is a reaction ''to their own personal experiences'' in the unemployment-torn economy, he says.

While economists temper their forecasts for consumer spending, consumer confidence is expected to rebound in 1983 as unemployment stops rising. So next year is expected to bring a moderate recovery in the housing and automobile industries as well as for other consumer products.

The September rise in new-home sales, to a seasonally adjusted annual rate of 464,000, still left a 7.1-month supply of unsold homes on the market. But that is down from an 11.7-month supply one year ago. One reason the homes sold was a sharp $7,000 drop in the average sales price during September to $82,300. That was the sharpest one-month drop on record.

Lower mortgage rates also are a driving factor in the sales pickup. For example, the interest rate on government-backed FHA and VA loans was 16.5 percent one year ago, but now is 12.5 percent. The drop makes homes affordable to a larger segment of the population.

For instance, if a home buyer devotes 32 percent of his gross income to housing expenses, a household income of $39,278 would be required to cover the payment on a $60,000, 30-year fixed-rate loan at 17 percent. At 13 percent the required income drops to $32,089, according to US League of Savings Association data.

Further reductions are expected in the mortgage interest rate. The average rate on loans closed in September was 15 percent. Given the level of other long-term interest rates, conventional fixed rate mortgages ''should get to 13 to 13.5 percent,'' in the near term, says Rosanne Cahn, vice-president and economist at Goldman Sachs & Co., an investment banking firm.

If her forecast of another full percentage point drop in long-term rates is correct, mortgages will be at 12 to 12.5 percent ''in the middle of next year,'' she says.

As a result of lower rates, roughly 1.3 million new homes will be started in 1983, according to James Christian, chief economist for the US League of Savings Associations. By contrast housing starts reached 2.02 million in 1978. ''housing looks much better, but I won't say it is a takeoff,'' he says.

And mortgage rates might come under upward pressure if savers switch existing accounts to a new kind of account banks and savings and loan associations will offer next year. The so-called money market accounts are being designed to offer interest rates that will compete with money market mutual funds.

''The more you get a shift within saving institutions into high interest acounts, the greater the pressure will be on mortgage rates to stay up,'' Mr. Christian says. That is because the new accounts will push up the cost of funds for S&Ls.

Car sales are about as sensitive to interest rates as are homes. That is one reason General Motors Corporation recently cut its financing charge on 1982 model cars from about 18 percent to 10.9 percent. The move is seen as a bid to clear out excess stocks of 1982 models so dealers can concentrate on selling 1983s.

Auto sales are still weak, and as a result the industry plans to build 5.5 percent fewer cars in the final three months of the year than in the same period in 1981 when sales were also depressed.

Forecasters see some hope for a stronger 1983 as consumer confidence and consumer balance sheets improve. ''We are expecting a 17 to 18 percent rise in sales to an average sales pace of 9.3 million cars,'' said Goldman Sachs economist Cahn.