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Leamer will be right, eventually. Experts have been expecting interest rates to rise for nearly a year. Instead, after drifting up last fall, rates have settled to where homeowners who missed their chance to refinance a year ago may find even better terms today. That was the case with Scott and Diane DeWenter of Temecula, Calif. They closed last week on a 15-year mortgage at 5.85%, replacing their 30-year mortgage at 8%. The DeWenters cut their payoff schedule in half and will save thousands in interest costs. But they were also able to add $40,000 to the mortgage balance and still lower their monthly payment to $1,974 from $1,998. "Awesome," says Diane, 35. She's spending that $40,000 on home improvements, and expects to get a bigger return for her buck from them than from stocks. "My parents just lost $200,000 in the stock market," she says. "I saw what happened to them. I prefer to invest in my home and pay it off."
The DeWenters have lots of company. In the 12 months that ended on June 30, Americans spent $114 billion remodeling their homes, up from $107 billion in the 12 months that ended March 31, Harvard's Joint Center reports. Some of the money came from stocks. But most was borrowed against homeowners' record $6.7 trillion of equity. Home has never been sweeter. "It's good to invest in your house, to fix it up," says Patricia Chavez, 40, who lives with her husband and three children in Moreno Valley, Calif. The Chavezes just borrowed $20,000 against the house, partly to pay off high-interest credit cards. "The price of homes going up has truly benefited us. Otherwise, we'd be drowning," she says.
Real estate has been a life preserver for the whole economy. With $8 trillion lost in the stock market in the past few years, steady gains in housing--and easy terms for borrowing against those gains--has kept the economy from falling hard. Typically, housing-related activity accounts for $1.40 of every $10 spent in the U.S. But last year housing accounted for about $2 of every $10 spent and for more than half the nation's GDP growth, says David Lereah, chief economist at the National Association of Realtors.
Housing experts measure supply in months, with a six-month inventory considered normal. The national backlog reached 9.2 months in the 1990 recession but today stands at just 4.8 months. The upshot: even if demand slackens, prices can hold if sellers simply wait a normal length of time for the right buyer to surface. Increasingly, that buyer is a new American. Greenspan can get breathless describing "the incredible rise in immigration," which he says accounts for "a third of the rise in household formation" and "has been a major factor holding the price level of homes up." Today more than 1 in 10 Americans is foreign-born, compared with 1 in 20 in 1970. This influx of citizens, mainly from Latin America and Asia, will help drive demand for an additional 1.1 million homes a year, according to Harvard's Joint Center.
Are yellow flags emerging? Sure. Last month's 3.6% downturn in housing starts and 11.7% drop in existing-home sales came just after homebuilding companies like Toll Brothers and Ryland saw their stocks sag for the first time in a year. But keep in mind that contractors and banks became more cautious about overbuilding after they were scorched in the savings-and-loan fiasco of the late '80s.