Higher mortgage rates are testing the depth of U.S. housing demand, according to U.S. Housing Markets, published by Lomas Mortgage USA.

The nation's economy is sound and employment is growing, the publication said, but the sharpest mortgage rate escalation in seven years has created a higher hurdle toward homeownership.

It is testimony to the housing market's strength that sales have not collapsed, the publication concluded.

Writing in the September issue, Gary Kell, president of Lomas Mortgage USA, said higher rates would not prevent further construction growth, but the rate of increase has been slowed2 Nationwide volume of residential building permits will probably show a 5% gain for 1994, instead of the 15% gain that seemed likely at the beginning of the year.

The publication tracks housing activity in national, regional and local markets, along with employment and other economic and demographic trends. Lomas Mortgage USA, a financial services company, is based in Dallas.

Single-family homebuilders will pull slightly more than one million permits this year, said Mr. Kell. Multifamily volume will push total U.S. residential permits to about 1.25 million units this year, he predicted.

Last year's total was 1,199,063 residential permits nationwide.

For most of this summer, 30year mortgages have carried fixed rates averaging 8.5% or more. Last fall and winter, before the Federal Reserve Board began tightening credit, fixed-rate mortgages were near 7%.

This year's costlier fixed-rate mortgages generally have slowed sales of houses aimed at the move-up market more than the more affordable entry-level offerings, said Rex Masterman, executive vice president of Lomas Mortgage USA.

"Potential move-up buyers have their own sale to consider," Mr. Masterman said, "and they worry that a higher mortgage rate might mean a longer listing time or lower offers for their existing home ."

First-time buyers have no similar concern.

Mr. Masterman also noted that more builders were buying down interest rates to facilitate closing deals with homebuyers.

"Generally, homebuilders report traffic through their projects is off only modestly. But the resulting sales decline has been unmistakable. In midsummer, many would-be buyers were still shopping, but fewer were willing to affix their signatures to a sales contract," he said.

The U.S. Housing Markets report cited three factors which could make higher mortgage rates less troubling this time than in previous housing cycles:

* Solid employment growth, instilling confidence in potential homebuyers. Some 2.1 million jobs were created nationally from mid-1993 to mid-1994.

* A greater variety of mortgage finance instruments, including adjustable-rate loans, tailored to fit the borrower's needs.

* The moderate pace of the housing industry's recovery, which has kept a lid on prices despite the higher cost of materials. Builders who survived the 1987-91 industry shakeout have learned to control costs and work with thinner profit margins.

U.S. Housing Markets said some locales in recessionplagued California have shown new life for housing. In Orange County, single-family builders have more than doubled their activity in the past year. Homebuilding also has increased in San Diego and in parts of the San Francisco Bay area.

Florida remains the busiest state for residential construction. U.S. Housing Markets said builders in Florida acquired neariy 68,000 permits during the first six months this year, up 18% from a year ago.

Texas builders increased their output by more than one-third in the first half of 1994, acquiring some 49,000 permits for new dwellings.

The hottest market, however, was Las Vegas because of its high number of building permits relative the population - 24 per 1,000.

In the rental market, the situation appears to be improving, according to Mack Rogers, a Lomas managing director.

"During the first six months this year, U.S. builders pulled 126,208 multifamily permits - a 39% increase from last year," he wrote. "Multifamily builders brought 77,000 units to completion during this year's first half, compared with 72,000 a year ago ."

Lenders believe that new rental units are a positive sign for the mortgage business because they open up additional pathways to homeownership.

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