US Housing-Market Pace Picks Up

The recent uptick in mortgage interest rates is not expected to slow down sales

FOR Larry Sorsby and his co-workers at Hovnanian Enterprises Inc., Christmas has come early this year. Hovnanian, the largest builder of new homes in New Jersey (and 10th-largest in the United States) has watched orders continue to flow into its headquarters in Red Bank, N.J.

``Homes are selling very well and the new orders just keep pouring in,'' says Mr. Sorsby, senior vice president.

At Hovnanian, orders for new homes are up 56 percent through a six-month period ending Aug. 31. Sorby says he does not expect a major reduction in the pace of new orders in coming months, despite a slight increase last week in mortgage interest rates.

The US Commerce Department announced last week that sales of new, single-family homes shot up 20.8 percent in September, to a seasonally adjusted annual rate of 762,000 homes. That represents the largest monthly increase since December 1986. Sales were up in all regions of the US except the Northeast, where they dropped 7.1 percent. Meanwhile, housing starts in September rose to a seasonally adjusted rate of 2.8 percent, the highest rate since February 1990.

But builders and financial analysts are asking whether this year's strong pace in housing starts and home sales will continue, given the latest uptick in interest rates. The average rate on a 30-year fixed-rate mortgage rose to just above 7 percent last week, up from 6.86 percent the week before, according to the Federal Home Loan Mortgage Corporation.

``A modest increase in interest rates will not bring about any general change in the current housing market,'' says Eric Belsky, an economist with the National Association of Home Builders in Washington. ``If the [public] perceives that interest rates are headed up in a big way,'' toward the 8 percent range on a 30-year fixed-rate mortgage, ``then such an increase does make a lot of people rush out to buy a house now,'' to lock in low rates. But ``modest'' increases, Mr. Belsky says, such as the one that occurred late last week, are not expected to fundamentally alter the current pace.

Belsky adds that he expects long-term rates to either stay in their current range - from 6.85 percent to around 7 percent - or to come down somewhat. But there could be a slight upturn in short-term adjustable rate mortgages, he says.

Belsky says the current red-hot pace in the housing market should spill over well into 1994. That is due to the level of interest rates (currently hitting 25-year lows), the modestly expanding economy, which should eventually put more people back to work, and rising consumer confidence.

``There would have to be a major rise in interest rates, such as above 8 percent, before the housing market picture substantially changes,'' in a negative way, says Richard Rippe, chief economist with Prudential Securities Inc. ``Right now, we just don't see any kind of an increase'' like that on the horizon.

Mr. Rippe says most of the gain in housing activity this year will come from single-family units, although there could be a slight improvement in the multi-family housing market because of a ``renewal of low-income housing credits.''

Some economists say the verdict is still out on whether the current high pace of housing activity can continue. ``With interest rates turning up slightly, it could be expected that there will be a rush of people'' seeking to lock in low rates, says Cynthia Latta, an economist with DRI-McGraw Hill, an economic consulting firm in Lexington, Mass.

But DRI, she says, is not convinced that the current torrid pace of home sales can be sustained well into 1994. ``Income gains'' are not growing fast enough to offset depleted savings, Ms. Latta says. Early next year, ``some consumers will probably realize that they have no savings left,'' and will start to replenish savings. That, she says, could slow the pace in housing activity.