Officials of the housing industry expressed worry this week that rising interest rates might scuttle the housing recovery.
"We're very worried; this could go down as the shortest housing recovery in the postwar period," said Harry Pryde, president of the National Association of Home Builders. "I think we're in danger of losing whatever momentum we had going for us the first half of the year."
Pryde's pessimism followed release of government figures showing that sales of new single-family homes fell 2.9 percent in June, the first drop in four months, to a seasonally adjusted annual rate of 638,000 units. The decline, which still left June sales 72.9 percent above the year-earlier rate, followed sales advances of 3 percent in March, 4.3 percent in April and 3.1 percent in May.
The report, from the Departments of Commerce and of Housing and Urban Development, came after news of a decline in housing starts during the month and a leveling off in the pace of sales of existing homes.
Earlier in the week, a HUD-announced increase in the maximum rates for government-backed mortgages took effect, raising the maximum rate on single-family mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration a full percentage point to 13 1/2 percent, their highest level since last September. Just three months ago, the FHA rate was 11 1/2 percent, the lowest in nearly three years.
In raising the allowable FHA and VA rates for the second time in three weeks, HUD officials said the rate hike reflected a general increase in interest rates, with conventional fixed-rate mortgages up to about 14 percent.
"The recovery of housing remains threatened as long as there is upward pressure on interest rates, as is now the case," said Jack Carlson, chief economist and executive vice president of the National Association of Realtors.
Mark J. Riedy, executive vice president of the Mortgage Bankers Association, also expressed concern that a 14 percent mortgage rate "is the threshold that begins to choke off housing recovery. What that says is we're right back almost in the soup again."
But Riedy, who admits he's in a minority, doesn't think rates will continue to rise. "I think mortgage rates will come down half to 1 percent by the end of the year," he said. In the interim, he thinks some things are working to keep demand strong. Some potential buyers think rates will go up and want to buy before they do; others see house prices starting to go up and may want to buy now, he suggested.
This week's housing sales report also said that the median price of a new single-family house jumped from $75,400 in May to $77,200 in June. The average cost of a new house rose $3,500 to a record $93,000, nearly $10,000 higher than it was a year ago.
HUD Assistant Housing Secretary Philip Abrams admits that the increase in interest rates is going to put "a damper" on the recovery to some degree. "But we feel the housing recovery has a life of its own, that it will keep moving," he said.
He noted that, when the FHA rate went down to 13 1/2 percent last fall, it was the point at which activity in housing started. "We're still at a level where interest rates will sustain activity," said Abrams, who is also FHA commissioner. "Obviously, interest rates going up won't help, but it won't revert to a year ago."
However, the rates do freeze out some potential home buyers who won't qualify for houses because of the higher interest rates, he noted.
According to the Home Builders' Pryde, the two-percentage-point increase in the FHA and VA mortgage rates in the last three months has increased the cost of carrying a $65,000 loan by more than $100 a month. "Consequently, more than 4 million American households have been priced out of the market, and even many of the sales contracts signed in June could fall through the cracks before they reach settlement," Pryde said.
Although Pryde believes that HUD should have tried to raise the FHA and VA loan rates half a percentage point instead of a full point, Abrams said the market wouldn't have allowed it. "We keep stressing that FHA interest rates don't determine what the market is and don't cause higher interest rates," Abrams said.
When HUD announced the increase, it said the action was designed to reduce the number of points being charged to obtain an FHA-backed mortgage. In making the announcement, HUD Secretary Samuel R. Pierce Jr. noted that a poll of mortgage bankers had showed that the average discount being charged on a 12 1/2 percent loan was 8 points--or 8 percent of the loan amount. "It is extremely difficult to originate loans at this level . . . ," he said. "Many lenders have begun to drastically reduce their operations."
If the rates are kept low and the points are up, the effective rate is still what people have to pay to get a long-term loan that investors will accept, Abrams noted.
(A random check of mortgage rates showed this week that lenders offering the 13 1/2 FHA and VA mortgages in the Washington area were charging 4 1/2 to 7 points. Conventional 30-year loans ranged generally between 13 3/4 and 14 1/2 percent, all with two points.)
Abrams also said that the FHA has a statutory responsibility to keep points at a reasonable level. "Eighty percent of our business is with existing homeowners who in many or most cases sell a house to buy another one," he said. The homeowners can't afford to pay points so it has an impact on the resale of existing houses, which is almost 80 percent of FHA's business, Abrams added.
"Our decision is based on how it affects homeowners who are buying houses and homeowners who are selling houses," he said.
Everyone blames higher interest rates on the expectation in financial markets that interest rates are going to be higher--something blamed in turn on the anticipation that the country's fiscal problems are not going to be faced. "As soon as there is an indication that the Congress, or the president, or both together are facing those problems, the expectation of higher interest rates will lessen and interest rates will come down," Abrams said. "A lot of psychological things are affecting the market."
The enormous budget deficits require the federal borrowing to finance them, a fact of life that increases competition between the federal government and the private sector for credit. This week, the Treasury was in the market for a $15.75 billion refunding.
"I think the present rate-levels fear reflect fears of a credit squeeze rather than actual supply and demand," the Mortgage Bankers' Riedy said. "Eventually we'll have a budget, and we'll know what it is to relieve uncertainty."