Home Sweet Home Sales

A rate dip and consumer cash spike mortgage applications

Corporate profits are setting records. Unemployment drops to a 24-year low. Even wages are beginning to see an upswing.

Here's another statistic to add to the pile of good economic news: buoyant mortgage applications. Spurred by a drop in 30-year mortgage rates, from 8.4% a year ago to about 7.5% in July, applications from house hunters are at their highest level since the Mortgage Bankers Assn. began keeping tabs in 1990. Given the average two-month lag between applications and closings, that suggests that the strong housing market will continue into the fall, providing a boost to the economy as money trickles down to appliance makers, furniture manufacturers, and the like.

The hot housing industry is a bit of a surprise. Experts expected the market to cool following record 1996 sales. But after a spring breather, June saw a 6.1% spurt in new-home sales, to 819,000 units. The 4.1 million annual-sales rate of used homes in June was vibrant as well. "We weren't expecting it, but the housing markets are very strong right now--and that's driven by the economy," says David A. Lereah, chief economist at the Mortgage Bankers Assn.

FED HELP. Washington's new tax law could extend the boom into 1998. The measure permits first-time home buyers to take cash out of their retirement plans to use for a downpayment with no penalty. And it expands the exemption from capital-gains taxes on home sales to $500,000 from the current $125,000. "We think we will be seeing some churning," says Joel H. Rassman, chief financial officer at Toll Brothers, a homebuilder based in Huntingdon Valley, Penn. "It will free up all this money from people."

As in the overall economy, inflation is quiescent. The National Association of Realtors says that median prices edged up only 3.5% in June from a year ago. "The public is beginning to realize that the days of making an absolute killing are past," says Kansas City Realtor Myra Siegel.

If that attitude prevails, it could keep the housing market from overheating--and ensure steady growth without inflation well into the new year.

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