Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Mon, Aug 17 1992 Date: Mon, 17 Aug 92 04:19:44 EDT Message-ID: 08-17 0000 BONUS: Low rates add fuel to recovery USA TODAY Update Aug. 17, 1992 Source: USA TODAY:Gannett Information Network If you think the economy is bad now, imagine what it would be like if mortgage rates were up on the roof instead of in the basement. Mortgage rates and the housing industry are key factors in monitoring the health of the economy. WHAT ARE THE OBVIOUS ADVANTAGES OF LOWER MORTGAGE RATES? While the economy is stumbling through the slowest recovery since World War II, it is growing if only slowly. That's due in large part to the boost lower mortgage rates are giving to home sales and home-construction starts. Another plus: Lower rates are tempting many homeowners to refinance their existing loans. That's putting money back into their pockets - money they can spend on other things. WILL FURTHER DROPS IN MORTGAGE RATES SPUR SIGNIFICANT GROWTH? Changes in the economy - and in the housing industry - have sapped some of the strength the home market has given to past recoveries. "We've gotten about all the pop we're going to get," says David Wyss, research director for DRI:McGraw-Hill, a Lexington, Mass.-based forecasting firm. WHAT ROLE DO LOWER INTEREST RATES PLAY IN BOOSTING THE ECONOMY? In past slumps, the housing industry played the role of locomotive, pulling the rest of the economy up the hill. The driver: low interest rates. Home buyers and builders usually were the first to respond when rates fell. Rising home starts and sales stimulated the demand for other goods and services, clearing the tracks for recovery. WHAT POSITIVE EFFECTS ARE LOWER RATES HAVING NOW? Over the past year, the average rate on a 30-year fixed-rate mortgage has fallen from more than 9 1:2% to less than 8%. That's the lowest rate in almost 20 years. The result: Home-construction starts surged earlier this year and are still running 24% ahead of 1991's anemic pace. Existing-home sales have tailed off a bit in recent months but are expected to easily beat last year's total. HOW DO NEW HOME STARTS BOOST THE ECONOMY? On average, a 1-percentage-point drop in mortgage rates can spur the construction of up to 58,000 new single-family homes, says David Seiders, chief economist for the National Association of Homebuilders. That translates into almost 100,000 jobs and nearly $2.6 billion in wages for construction crews, loggers, appliance assemblers and other workers. In a $5.7 trillion economy, that's not much, economists note. But it's more than welcome at a time when job growth has been extremely sluggish. While home construction accounts for a little more than 2% of gross domestic product - the overall measurement of the economy's size - in some years, it represents as much as a third of investment spending, a key ingredient in any recovery. DO SALES OF EXISTING HOMES CONTRIBUTE SIGNIFICANTLY? While not as potent as new-home construction, existing home sales also push a lot of money through the economy. According to the National Association of Realtors, the typical home sale generates more than $8,000 in fees and other expenses. Realtors alone collect nearly $23 billion a year in commissions. Closing costs - points, origination fees, appraisals and such - total another $7.6 billion, the NAR estimates. Lower mortgage rates can have a powerful effect as well. A 1-percentage-point drop in rates can boost home sales by as much as 14%, says Wyss. Rising home sales and prices boost consumer confidence - a key economic problem now. WHAT OTHER PATTERNS DIRECTLY RELATED TO HOME SALES HELP? Homeowners spent $47 billion last year on home improvements, additions and other big projects. The average seller spends $365 on minor repairs to ready a home for sale, according to the NAR. Also, the purchase of a home usually triggers a domestic spending spree as home buyers splurge on furniture, carpets, appliances and other items. HOW SIGNIFICANT IS REFINANCING? With home loans accounting for 68% of the typical family's debt burden, even small changes in interest rates can have a big impact on the household budget. The popularity of adjustable-rate mortgages and the ease of refinancing allows homeowners to quickly enjoy the benefits of lower mortgage rates. The Mortgage Bankers Association says lower mortgage rates will save consumers nearly $12 billion this year. WHY AREN'T HOME SALES HIGHER? Experts say the industry's post-recession surge probably is over. In part, that's because job growth has been unusually slow. Unless people feel secure about their job, they're not likely to buy a home - or splurge on extras. Many owners are too deeply in debt to think about trading up to a bigger home. According to the Federal Reserve, the average homeowner's mortgage is equal to 45% of the value of the home, up from just 30% in 1984. WHAT IS THE DOWN SIDE OF LOWER INTEREST RATES? While refinancing helps homeowners, it takes money out of the pockets of investors by lowering the yields on mortgages and mortgage-backed securities. Many homeowners also depend on interest earnings to supplement their paycheck, so lower savings interest rates have also reduced their income as well. That's all money that can't be spent to boost the economy. HOW DID INTEREST CAPS OF THE PAST AFFECT HOME SALES? In the old days, when the interest rates on bank deposits were capped by law, market interest rates would sometimes rise above that cap. When that happened, many depositors would invest their savings in bonds or other investments, forcing banks to cut back on loans to home builders and buyers. Result: A sharp slowdown in starts and sales. Often, that has helped bring on a recession. Then, when interest rates fell, banks would lend again, boosting the housing industry and triggering a recovery. HOW HAS DEREGULATION OF INTEREST RATES CHANGED THINGS? Now, no matter how high rates get, banks keep lending. And buyers keep borrowing since they know they can refinance their mortgage later if rates fall. That has smoothed out the booms and busts. While home starts plunged nearly 43% in the 1974-75 recession - before interest-rate deregulation - they fell only 26% in 1990-91. CAN THE USA EXPECT MORE IMPROVEMENTS IN HOMES SALES SOON? As baby boomers give way to the baby-bust generation, demand for housing is likely to remain sluggish for years to come. Bottom line: Housing is more likely to be the economy's baggage car than its locomotive. Bonus editor: DD Thornton. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM