Mortgage rates vs. home building

Like cracking foundations, high mortgage rates can threaten the home-building industry. When the rates get out of hand, many consumers stop buying and many builders stop building.

This week the Veterans Administration said it will boost its maximum home loan rate from 13 percent to 13.5 percent. Conventional mortgages, loans not backed by the government, have also been rising. The average rate charged for these fixed-rate loans (maturing in 25 years) ran at 14.11 percent last month, up from 13.74 percent in March.

But the building industry is nowhere near crumbling because of the higher - and still rising - mortgage rates. New home starts for the first quarter made it ''the best first quarter in nearly 11 years,'' says Dean Crist, an economist at the National Association of Home Builders. ''In addition,'' he says, ''we feel the second quarter will be very good as well, though not as strong as the first.''

When put in a historical perspective, today's rates tower like the World Trade Center. But they still haven't cast much of a shadow on the building industry. Robert Gough Jr., a senior vice-president of Data Resources Inc., explains the phenomenon: ''At the level rates are today, they would historically have killed housing. The reason they haven't is the adjustable-rate mortgage.''

The adjustable-rate mortgage (ARM) runs 2 to 2.5 percentage points below fixed-rate mortgages, explains Mr. Crist, at the building association. These loans, which move up and down with interest rates and usually have a limit on how high they can go, have allowed many buyers into the market who otherwise could not have afforded the monthly payments of a fixed rate.

''Today, 60 percent of all new homes sold are using adjustable-rate mortgages , while a year ago we were talking 25 to 30 percent,'' says Crist. ''When rates get to say, 16 percent fixed and 14 percent adjustable, then something has to give. But at the level they are now, it looks very good.'' Crist also says there is quite a bit of speculative building going on, to meet the demand of people eager to buy new houses, before rates go even higher.

Thanks to ARMs, the industry has a nice cushion to keep it from being bruised too badly by the next drop in demand, economists say. John Savacool at Chase Econometrics sees mortgage rates rising this year and into next. But at next year's average, fixed rate - which he puts at a high 16.4 percent - the industry will be able to construct 300,000 more homes than it did at the same rate in 1982, simply because ARMs allow more buyers in the market.

Housing is no longer the locomotive pulling the recovery along, but it's still a strong contributor, Crist says. ''Of the total dollars of GNP increase, housing is taking less. But by no means does it suggest that housing is not an important factor in this recovery.'' Mr. Gough disagrees somewhat, commenting that, ''in the current quarter, it is going to be an average contributor.''

The industries tied to housing, such as appliances, building materials, and home furnishings, ''don't have a lot to fear right now,'' Gough says. Lumber will mirror the building picture. Appliances and home furnishings will enjoy their recovery a bit longer, because those products come in toward the end of construction. The success of the appliance industry may outlast housing, says Robert Holding, president of the Association of Home Appliance Manufacturers, because pent-up demand for replacement models is high. Appliances seem plugged into a record year.

Exactly how high and how fast mortgage rates will go is, of course, an unknown. The rough consensus is that fixed-rate, conventional mortgages will reach around 15 percent by the beginning of next year. Housing starts will begin their real slowdown in the second half of the year, analysts say, finishing the year at an annual rate of 1.6 million start-ups, compared with the first quarter's rate of nearly 2 million.

''I don't anticipate housing to really collapse, just to soften. We are not looking at a major housing reduction or another major (down) cycle,'' Gough says.