A bit of slowing from higher rates

Normally, David Seiders, an economist for the housing industry, is a proponent of low interest rates, the kind that keep buyers inking contracts for new homes. When there is even the whiff of higher rates, he is among the first to run up to Capitol Hill to argue against an increase.

But Mr. Seiders says an interest-rate hike now might actually be welcome: It could give builders a chance to catch up on orders - find enough wallboard and granite countertops to deliver a home on time. "The builders are all welcoming a cooling," says Seiders, chief economist for the National Association of Home Builders.

Some of the heat may be reduced as early as tomorrow when the Federal Reserve's Open Market Committee meets to decide whether to raise interest rates for the third time this year. Only a month ago, economists were convinced it would. Now, with virtually no signs of inflation and productivity improving, analysts are less certain of a boost.

The decision will be important beyond what it means for roofers and tin knockers. Most economists consider this the last chance Fed Chairman Alan Greenspan & Co. will have to increase interest rates for several months, because the central bank is not likely to make a move until any potential Y2K issues with the economy are resolved. Thus it will set the tone for the start of the new millennium.

"It's a very close call, but I think they'll go up by 0.25 of a percent," says Lyle Gramley, a former Fed governor and a consulting economist at the Mortgage Bankers Association in Washington.

If the Fed does hike rates, it will be because the economy is too strong. The unemployment rate at 4.1 percent is at a 30-year low. Retailers around the country are scrambling to find workers for the holiday season. Many people are now working two jobs because of the opportunity to make extra money.

With all its cylinders firing, economists believe the economy is growing at about a 4 percent rate - probably higher than the Fed would like to see.

Auto sales: going down

The economy remains strong despite two earlier rate hikes, which are now starting to affect interest-sensitive parts of the economy. On Friday, the government reported auto sales were down 1.6 percent in October and sales of appliances and furniture slipped 0.9 percent.

"This development will provide some comfort to Fed policymakers who have been worried about unsustainable growth in retail spending," says Jay Bryson, an economist at First Union in Charlotte, N.C. But he notes that growth in spending on items such as food, restaurants, and clothing remains strong.

The biggest impact of higher interest rates is in the mortgage-finance arena. For example, Calabasas, Calif.-based Countrywide Home Loans Inc. estimates its mortgage-refinancing business is down 75 percent from October of last year.

In the Boston area, mortgage activity is down as well, but for other reasons. Betsy Sullivan, a senior vice president at New England Capital Mortgage, says the mortgage market "has come to a halt" because of a shortage of affordable homes on the market and the high prices.

The average price of a house in the area is $245,000. "It's put a lot of first-time buyers out of the market," she says.

The ripple effect of the slowdown, combined with the drop in refinancing, has particularly hit mortgage underwriters and insurers. During a good year, George Mandell, a contract loan underwriter with Radian Guaranty in Braintree, Mass., estimates his office processes 60 to 100 loan applications per day.

The branch has maintained that pace for the past three years. But now the office is down 60 to 100 applications a month. The number of underwriters has dropped from 25 to five. "Are we in a recession, or is this a temporary thing?" asks Mr. Mandell.

In California, the new-home market remains strong. It is "very hot: it's a seller's market," says Stephen Brandt, a senior vice president at Countrywide, which is offering 30-year fixed rates at 7.87 percent.

Nationally, Seiders is forecasting that the home-building market will start to cool off. One sign this is already happening: Mortgage applications have fallen for the past few months. And the level of unsold inventory is starting to rise.

No free window blinds yet

Still, builders have yet to start to offer financing subsidies or extra options for free. And Seiders's surveys still show healthy levels of traffic in model homes. Complicating housing forecasts has been the buoyant stock market. "If the Fed decides not to tighten and the financial markets rally further, the case for a housing slowdown will weaken," Seiders says.

Last week, the stock market closed strongly with the Dow Jones Industrial Average gaining 174 points on Friday. Propelling the gains: A report that showed productivity in the third quarter rose by 4.2 percent, compared with the 3 percent forecast by economists. This is a number Mr. Greenspan watches carefully.

(c) Copyright 1999. The Christian Science Publishing Society