Interest Rate Drop Does the Trick

THE volume of home sales in the United States should continue to increase somewhat for the rest of the year but still fall below last year's level, industry economists forecast. A drop in interest rates caused a rise in the number of new and used single-family homes sold in June, after declining all year.

Norman Flynn, president of the National Association of Realtors (NAR), says, ``People have started jumping in where the water's not too deep'' - with lower interest rates encouraging house hunting, particularly in areas with relatively affordable prices.

However, predictions of rising home sales could be reversed should the Iraq-Kuwait affair prompt a permanent increase in interest rates, experts say.

Price trends vary according to individual metropolitan markets, indicating differences in regional economic performance (see map), according to data released yesterday by the NAR.

During the quarter ended June 30, the median price for used homes ranged from $345,000 in Honolulu to $45,100 in Youngstown, Ohio. Just as many homes sell for more than the median as for less than that figure.

The greatest growth continued to occur in the Seattle/Tacoma area, where the median price of $147,600 was 35.3 percent higher than in the second quarter of 1989. A price rebound in the Southwest also continued. The Midwest, however, emerged as the strongest region overall.

The national median price for the second quarter was $96,200, up 3.4 percent from a year earlier.

``I don't think we'll see anything close to a boom'' in housing sales for the remainder of 1990, says Mark Obrinsky, senior economist at the Federal National Mortgage Association. The FNMA, also known as Fannie Mae, is a privately owned, government-sponsored enterprise that provides affordable home financing.

Dr. Obrinsky is watching closely to see if the rise in interest rates prompted by the Iraqi invasion of Kuwait - 0.25 percent - will last. If it does, he notes, it will make the housing market worse.

However, at this time his forecast calls for a ``modest improvement, gradual improvement'' in the numbers of homes sold. The US is in its eighth year of an economic expansion, he says, so the pent-up demand for housing coming out of the last recession has already been met.

He points to other drags on home sales: Incomes are growing slowly - about the rate of inflation. The economy is decelerating, so it's not adding many jobs.

Obrinsky expects 580,000 new homes to be sold this year, down from 650,000 in 1989. Sales of used homes will be 3.38 million units against last year's 3.44 million, he says.

Obrinsky's figure for 1990 new homes sales is almost matched by the 575,000 forecast by Richard Peach, deputy chief economist at the Mortgage Bankers Association of America.

Dr. Peach notes that new homes were selling last November at a seasonally adjusted annual rate of 687,000 units. That figure slid to 526,000 in April, then recovered to 581,000 in June.

``It kind of looks like the worst is behind us,'' Peach says.

He sees July and August pegging a 600,000 rate, falling to 570,000 or 580,000 in the 1990 fourth quarter. The late-year decline will not be caused by changes in the economy, Peach says. He expects interest rates to stay at their recently lower levels. Rather, the initial surge of buyers taking advantage of those rates will merely level off.

It was the percentage-point rise in interest rates in the first part of the year that punctured home sales in that period, Peach and Obrinsky agree.

Peach recalls widespread expectations in the bond market going into December that the economy would slow further and maybe even enter a recession. This was seen as likely to trigger the Federal Reserve System to lower its interest rates for banks. These expectations kept mortgage interest rates down.

But perceptions changed after the new year. Fear of recession faded for some months.

And events unfolded rapidly in Eastern Europe, bringing the expectation that those countries would be competing with the US for capital to rebuild crumbling infrastructure and polluting factories.

``These events in East Europe are a big deal from an economic standpoint as well as a political standpoint,'' Peach says, referring to the possibility of higher interest rates deterring home buyers.

The combination of greater confidence in the economy and competition from abroad for capital pushed the yield on 30-year Treasury ``long bonds'' to 9 percent in May from its December level of 7.8 percent.

Effective mortgage rates (the contract rate plus points paid up front by borrowers) followed, rising from 10 percent in January to 11.1 percent in May.

As a result, Obrinsky of Fannie Mae says, the inventory of unsold new single-family homes reached 8.4 months of supply in April and 8.2 months in May - the highest levels seen in this economic expansion. A six-month supply is preferred by contractors.

Now, Peach says, concern over a recession has returned. Yields on long bonds are down to around 8.4 percent. The difference between that level and December's is the residual effect of Eastern Europe. ``It's never really that simple, but that's a way to get your arms around it,'' he says.

Today effective mortgage interest rates are back down to a contract rate of 9.5 to 9.75 percent, or 10.1 to 10.2 percent with points factored in. That decline was favorable enough to ignite June home sales, up 8 percent for new units and 1.2 percent for used models, according to the Commerce Department and the National Association of Realtors.

``I would regard it as pretty big for a three-month move,'' Obrinsky says of the interest rate decline, especially since the slightly larger rise last winter ``shut things down in housing.'' The inventory of new housing, he notes, shrank to a more comfortable 7.5 month supply in June.

Peach calls the 10 percent level a psychological barrier, below which ``people are comfortable locking into'' a mortgage interest rate.