Record Low Mortgage Rates May Be Finally Hitting Home

For housing-market observers, waiting for homebuilding to speed up this year has required the patience of Job. Despite the lowest mortgage rates in a generation, housing starts fell in July for the second straight month.

Now, however, the clouds appear to be lifting. The National Association of Home Builders (NAHB) reports that 40% of builders surveyed in August felt sales conditions were good (chart), the largest number since early 1989. With traffic of prospective buyers through model homes on the upswing, "housing should be one of the stronger components of GDP through the rest of the year," says economist Dean Crist of the NAHB.

The catalyst, of course, is collapsing interest rates, which for fixed-rate mortgages are down to 7.1%--a 20-year low that is making home ownership an achievable dream again for many households. In recent months, sales of both existing and new homes have been quickening, and mortgage applications for home purchases in recent weeks have been running 22% over late May.

While all this bodes well for housing over the near term, the NAHB's Crist cautions that building "can't really take off until job and income growth strengthen." Still, there are omens that the housing market could add significantly more punch to the economy.

For one thing, the construction upswing so far has stressed starter homes over the more expensive trade-up houses that are built once an expansion gets going. Now, however, it appears that more affluent households are starting to get into the act.

Economist Lawrence A. Kudlow of Bear, Stearns & Co. points to the effects of higher income-tax rates combined with the continuing deductibility of mortgage interest and the now significantly lower capital-gains tax rate. "High-income investors," he says "are likely to channel more funds into capital-gains-producing assets like housing." If that happens, the construction mix would shift toward costlier homes, so that any given level of housing starts would translate into a higher level of output.

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