What's Spooking House Buyers?

A lot may be riding on the ability of America's housing sector to bolster the economy in the year ahead. Residential investment is a bellwether--normally leading the way in upturns and downturns--and it spiked up during the summer in the wake of sharply falling interest rates. Since then, though, it has been losing ground. "The housing recovery has apparently stalled," says economist Lacy H. Hunt of HSBC Holdings Inc.

Recent omens are hardly cheerful. Although mortgage rates are now at their lowest in two years, housing starts declined in October for the third month in a row. Meanwhile, existing-home sales dropped 1.9% in October, even as average prices of such houses fell 1.1%--on the heels of a 2.7% drop in September.

To be sure, the Mortgage Bankers Assn.'s index of mortgage applications is up. But economist Maury N. Harris of PaineWebber Inc. thinks this may be partly due to a shift toward fixed-rate mortgages, the specialty of mortgage bankers. More important, the National Association of Home Builders reports that its housing market index, which reflects its members' latest views, posted its largest drop in 10 years in November.

Why the sag in housing--in the face of such low rates? Both Hunt and Harris point to the sluggishness of job and income growth. With household debt at a record 92% of aftertax income and with mortgage and installment-debt delinquencies rising, many consumers feel overleveraged, says Hunt.

Harris also notes that banks surveyed by the Federal Reserve in November reported they had started tightening mortgage-loan standards--for the first time since 1993. And feelings of job insecurity, reinforced by the recent surge in corporate layoffs, may be deterring some potential home buyers.

If the housing rebound has indeed been derailed, warns Hunt, it may take strong stimulative action by the Federal Reserve to put it back on track. "My fear," he adds, "is that such action will be too little and too late."

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