The Search for Shelter

Prospects of rising interest rates create confusion in the housing market

Is American home buying about to rise through the roof, or will it collapse and crash through the floor? That question is vexing builders, bankers and home buyers this spring as the prime house-hunting season gets under way. Indeed, the U.S. housing market suddenly seems to be a mass of confusing and conflicting signs.

Last week the Government revealed that March housing starts had taken the sharpest drop (26.6%) since records began to be kept in 1959. That disclosure, which put new construction for the month at an annual rate of 1.6 million units, dashed hopes that a major housing boom might be at hand. Such a surge had seemed pos sible just a month ago on the strength of news that February home starts were at a 2.2 million annual pace, the briskest in eleven years.

More mixed economic signals appeared last week. One day after reporting that personal income rose a scant .5% in March, the Government announced that the gross national product grew by an astonishing 8.3% in the first quarter of 1984. That was far above the Commerce Department's 7.2% preliminary estimate, and stunningly higher than the 5%-to-6% forecast for growth that most private economists had made. The gain in the G.N.P. was due primarily to higher inventories, a continuation of vigorous consumer spending and a hefty boost in federal farm subsidies.

The stronger-than-expected growth again raised fears of higher interest rates. Concern about the cost of money has in fact been a major influence on the housing market lately. Many consumers are rushing to buy because they think mortgage rates are going up. "I knew higher interest rates were on the way," recalls Donald Brooke, 37, a Chicago chemical engineer who last month bought a $100,000 home. "Originally I was going to wait before making a commitment, but this seemed the time to buy before costs got too high."

Steeper interest rates could bring the entire housing industry to a halt. The cost of a conventional, fixed-rate mortgage has been edging up: such loans averaged about 13.85% in March, compared with 13.69% a month earlier. Each percentage-point boost in mortgage prices knocks about 2.5 million potential buyers out of the housing market. Above a rate of 14%, moreover, only about one family in six can qualify for a mortgage. Says Ken Kerin, vice president for economics and research of the National Association of Realtors: "Our greatest fear is another notch up in mortgage rates. If they go up another three-quarters of a percentage point, we could repeat the experience of 1981 and 1982 and end up with a housing crunch."

Construction companies also have been fretting about the outlook. An April survey of the National Association of Home Builders found that members fear that business will worsen in coming months. It was the first sign of pessimism in two years. "Change is in the wind," says Michael Sumichrast, chief economist for the organization of 40,000 builders.