Home builders remain optimistic as rates remain low

Tuesday, July 20, 2004 | 11:05 a.m.

BLOOMBERG NEWS

An index of U.S. home builder optimism for July held near this year's average as a decline in borrowing costs underpinned demand, a private survey showed Monday.

The National Association of Home Builders said its measure of builder confidence in demand for single-family houses was 67, down from a revised 68 in June. A reading higher than 50 means builders view market conditions as more positive than negative. The index has exceeded 60 for more than a year and in October reached 72, the highest since December 1999.

Mortgage rates have fallen in the past few weeks following economic reports that showed growth may have slowed in June, suggesting inflation is under control and that the Federal Reserve can raise rates at a moderate pace. Cheaper borrowing costs may be helping to lure homebuyers, economists said.

"Mortgage rates subsided back to around 6 percent during the survey, and this likely contributed to builders' optimism," said NAHB Chief Economist David Seiders, in a statement. "The continuing robust rate of home-price appreciation, high level of new household formations and perceptions of an improving economy are also helping drive the market."

The index had been forecast at 67, the same as originally reported a month earlier, based on the median of 14 economists' estimates. Projections ranged from 65 to 68. The association's index was based on 227 responses in a survey of builders.

A gauge of buyer traffic in the builders' survey fell to 50 in July from 53 in June. The index's measure of current sales held at 73 this month, and a gauge of sales expectations in the next six months slipped to 73 from 74.

Freddie Mac, the second-biggest buyer of home loans, said last week that the average rate on a 30-year fixed mortgage in the U.S. fell to 6 percent, the fourth straight drop and the lowest in almost three months. The Mortgage Bankers Association, based in Washington DC, on Wednesday raised its 2004 forecast for existing home sales to a record.

June home construction may have risen to the second fastest pace this year. The Commerce Department is likely to report today that housing starts increased to an annual pace of 1.994 million units last month from 1.967 million in May, according to the median forecast in a Bloomberg News survey of economists.

"Home sales continue to run hot this summer, and most builders don't see a slowdown on the horizon," Bobby Rayburn, a Jackson, Miss., builder and president of the Washington- based trade group, said in a statement.

The economy is expected to grow 4.5 percent this year, the fastest since 1999, according to the median estimate of economists surveyed by Bloomberg News June 25 to July 6.

Demand for homes may start to decline as Federal Reserve policy makers raise interest rates to keep inflation from accelerating, economists said. Job growth will still help support housing in the second half of the year, economists said.

U.S. mortgage applications fell for the second time in three weeks as refinancings declined and home purchases dropped, the Mortgage Bankers Association said Wednesday.

A report by Goldman Sachs Group Inc. last week said U.S. homes are overvalued by 10 percent and prices could decline even without a sharp run-up in mortgage rates. While not predicting a drop in house prices, the economist said there is a "risk that the necessary correction accelerates into something worse" as homes have been overvalued for three years.