The outlook for housing.

• Author: Fisher, Jeffrey D.
• Position: Statistical Data Included

Activity in the nation's home building industry is expected to hold up fairly well against a general decline in economic growth during the final two business quarters of 2001. While the terrorist attack on America on September 11th has had a negative impact on consumer confidence, it appears that a healthy number of prospective homebuyers remain in the marketplace, and that low mortgage interest rates are helping to moderate the housing slowdown that is now occurring.

For the past year, the role of housing has been anything but typical, as it remained strong as the economy weakened, preventing growth of the Gross Domestic Product from turning negative. New residential construction alone accounts for 5 percent of the GDP on average and 14 percent when related financial and other activities are included.

The drop in mortgage rates from a peak of 8.7 percent in May of 2000 is helping to support the industry by making home buying more affordable. Interest rates are around 6.5 percent for fixed-rate mortgages and close to 5 percent for adjustable-rate mortgages. According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.82 percent in September, down from 6.95 percent in August; it was 7.91 percent in September 2000. Rates for fixed-rate mortgages had increased slightly at the time of this writing, but remain near historic lows, which allows homebuyers and people refinancing their homes probably the best mortgage financing terms since the 1960s.

There are some reasons to believe that the next significant move in long-term mortgage rates will be up from current levels. For one, the rate on the 10-year Treasury Note, a bellwether bond used to help price mortgages, has kicked up recently. It stands now at 4.57 percent--not that much higher than its recent low of 4.48 percent on October 3rd, but it is not falling, either.

Second, the housing market may be holding up better than most had expected following September 11th. The number of mortgage applications to finance a home purchase has been rising, and is down only modestly from its pre-terrorist attack levels. And housing starts did not swoon during September, as had been widely expected. (While the reported September pace was actually stronger than August's rate, the two numbers are, statistically speaking, indistinguishable.) All of this activity means that demand is holding up better than expected, which adds upward pressure to mortgage...