House Passes Privatization Of Sallie Mae: Senate to Vote

Low unemployment and flat inflation were clearly central to the Federal Reserve's decision on Tuesday to leave interest rates unchanged. But the Fed also had to make sense of the bellwether housing sector, which has been sending off conflicting signals in the past week.

Driven by single-family construction, housing starts jumped unexpectedly in August to their highest level in two and a half years, the Commerce Department reported last Thursday. Such brisk activity seemed to add fuel to concerns about an overheating economy.

But on the same day, the Commerce Department also said permits for new construction fell in August to the lowest level since January - a possible sign of an incipient slowdown.

By Wednesday, one day after the Federal Open Market Committee's closed- door meeting, the picture had gotten even murkier. The National Association of Realtors reported that homes were reselling in August at a healthy pace of more than four million units a year, down just 0.5% from July.

Seasoned housing economists are struggling to make sense of it all - and reaching dramatically different conclusions.

Last week, David Lereah, chief economist of the Mortgage Bankers Association, read the falling permits as a sign that builders were finally preparing to slow construction.

"When you look at permits coming down several months in a row, it's got to tell you that eventually builders are not going to be digging a lot of holes in the ground," he said at the time.

Still, he noted, higher mortgage rates had done little to dent consumer appetite for home purchases. And by Wednesday, the report on home resales had him firmly bullish on the housing outlook.

"The housing sector is showing really no signs of slowing down," Mr. Lereah said. "Starts are up to almost record levels, and home sales activity remains unbelievably strong." Moreover, he said, his trade group's mortgage application index indicates that people are continuing to buy homes in a big way in September.

But David Seiders, chief economist at the National Association of Home Builders, seems convinced that the housing sector is slowing down significantly.

He points to the number of new construction permits, which has fallen three times since May.

In addition, the trade group's own monthly surveys show that builders are seeing less traffic through their new homes and expect lower sales in the next six months, Mr. Seiders said.

Even the data on housing starts support the notion of a slowdown, Mr. Seiders said. Averaged over July and August, housing starts were flat with the second-quarter level. The slight August drop in sales of existing home sales also suggest a slowdown, he said.

"The point is, (all the housing data) are either flat or down," Mr. Seiders said. "That's the key to how housing will affect the growth rate of the economy in the third and fourth quarter."

Economists acknowledge that the housing indicators are tricky to read. Permits, for instance, are considered an important indicator of future housing activity. But though 60% are used in the month they are obtained, the rest are used over a longer time span, according to Steven Berman, survey statistician at the Census Bureau.

Nevertheless, Sung Won Sohn, chief economist at Norwest Corp., Minneapolis, says the permits index is a better guide than housing starts to future construction activity.

But Mr. Sohn is more struck by the fact that consumers are still exhibiting a strong appetite for buying homes, despite higher mortgage rates.

In this recovery, "housing has had nine lives," Mr. Sohn said. It's going to take substantially higher rates to slow housing down, he said.

Some lenders are unfazed by the vagaries of the housing market.

In Olney, Md., Sandy Spring Bank's mortgage unit is taking a decidedly bullish view of the construction business. Dave Pulford, vice president, said he has boosted staff by almost 50% to handle strong demand for construction loans in the past few months.

Though the Realtors report a slowdown, Mr. Pulford said, demand for construction loans remains brisk this month, and he doesn't foresee any trouble keeping his company's 20 employees busy.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER