Rates rise a bit, home sales tumble
By Holden Lewis • Bankrate.com

After a shallow, one-week dip, mortgage rates have risen to just about where they were two weeks ago. Rates are still low. The question is whether they are low enough to keep the housing market hot.

The benchmark 30-year fixed-rate mortgage rose 7 basis points to 5.89 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 6.44 percent.

The benchmark 15-year fixed-rate mortgage rose 5 basis points to 5.25 percent. The benchmark one-year adjustable-rate mortgage rose 13 basis points to 4.22 percent.

The last week hadn't brought any surprising news on the economy -- that is, until Wednesday morning, when the U.S. Census Bureau released its estimate of new-home sales in July. Sales of new homes were much weaker than expected. In somewhat of a contradiction, the pace of existing-home sales in July was the third-fastest ever, according to the National Association of Realtors.

The two tallies of home sales are very different. The federal government counts a new-home sale when someone makes a deposit or signs a contract for a newly built dwelling. It counts the person who walks onto an empty lot and signs a contract to have a house built there, and it counts the person who makes a deposit on the last condo in a new building. The Realtors count an existing-home sale when a property is transferred at the closing table. Most of those homes are ready for occupancy, whether they're new or not.

Existing homes were sold in July at an annual rate of 6.72 million, down about 3 percent from the June figure of 6.92 million, which is the record. This May, June and July were the three busiest months ever for home sales, according to the Realtors.

On the other hand, the Census says that new-home sales dropped 6.4 percent in July, to an annual rate of 1.134 million houses. Wall Street had expected the pace to be closer to 1.3 million.

Analysts attributed the drops in home sales in July to a rise in mortgage rates. If that's what happened, it was a belated reaction. Mortgage rates rose in May and June, then dropped abruptly at the beginning of July. They remained relatively steady in July, varying from 6.08 percent to 6.17 percent in Bankrate's weekly survey, before dropping abruptly again at the beginning of August.

A lot of people lock their mortgage rates a few weeks in advance, so maybe it's true that the rate rise in May and June resulted in a drop in home sales in July. If that's the case, home sales should rebound in September and October, two months after the current dip in mortgage rates.

Meanwhile, prices keep rising. According to the Realtors' data, the median price of a home was $191,300 in July, an 8.7-percent increase over the July 2003 median price of $176,000. Half of houses sell for more than the median.

The Census says the median price of a new home in July was $207,400, a 9-percent increase over the July 2003 median of $190,200.

Experts within the housing industry shrug off any suggestion that there's a national housing bubble. "I would imagine that people who are in the market for a home, action is preferable to inaction," says Bob Walters, senior vice president of secondary marketing for Quicken Loans. He doesn't see the housing market slowing down much because rates remain low, mortgage bankers keep inventing new products that make it possible for people to buy and the population keeps expanding.

David Lereah, chief economist for the National Association of Realtors, says today's low rates "will preserve favorable housing affordability conditions and help to keep home sales historically strong in the months ahead."

John Urbanchuk, economist for LECG, LLC, an economics consulting group in Wayne, Pa., says he believes the rate of growth in home prices will slow eventually, but prices won't fall -- at least, not in broad geographic areas. "I'm not a believer that there's a housing bubble in the United States or in any region of the country," he says. As values continue to increase, he expects home equity loans to increase in popularity.

Observers outside the housing industry are registering some stirrings of worry. "Demand has been at levels that are not sustainable once mortgage rates get back to more normal levels," says Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. Housing "is the one sector that the Fed has to watch closely," he adds.

Lo and behold, that's what Fed chairman Alan Greenspan is doing. In a letter written in response to questions posed by Sen. Richard Shelby, the Fed chairman said he doesn't have enough information to know whether a housing bubble exists. That's quite different from asserting that no bubble exists.

Greenspan acknowledged that home prices have gone up much faster than incomes and rents in the last few years. That doesn't necessarily mean that there's a housing bubble, but one can't be ruled out, Greenspan said.