After five short-term interest rate cuts in as many months, a sense of optimism had returned to the national Fed-obsessed marketplace. But hopes for a quick economic recovery are fading, smothered by rising unemployment rates and the slide of the one economic indicator that had held up until now - housing. Still, the reports aren't as bad as they seem, insists the National Association of Realtors.

For two weeks in a row, first-time jobless claims were up, reaching their highest levels since April 28th, says the Labor Department which revised its earlier report that claims were slowing. Alarming economists were two points - the numbers had risen and risen sharply. White House economic adviser Glenn Hubbard told Congress' Joint Economic Committee last week, "The recent level of initial claims for unemployment insurance suggests that the unemployment rate will likely continue to rise over the next several months.''

The U.S. unemployment rate is now at 4.5 percent, and is expected to rise to 4.6 percent in May.

Since it is employment that most affects housing starts and sales, it was only inevitable that housing numbers would start to come down.

Both the National Association of Home Builders (NAHB) and the National Association of Realtors (NAR) have announced slowdowns, suggesting that the housing market is flattening. Yet, association leaders remain optimistic due to continuing low mortgage interest rates.

According to the Commerce Department, sales of new single-family homes declined 9.5 percent in April to a seasonally adjusted annual rate of 894,000 units. Yet, says Bruce Smith, president of the NAHB, "An 894,000-unit sales rate is still quite healthy on an historic basis, and is actually higher than the average sales rate for any of the last three years.

"Low interest rates on long-term mortgages, which NAHB projects will remain in the low 7 percent range throughout this year, are helping keep buyer demand firm," continues Smith, "But weakening of the general economy, as evidenced by lower consumer confidence and sliding job markets, will eventually have a negative impact."

The NAHB is forecasting a moderate decline in new home sales through the end of 2001, but because the volume of activity has been so strong in the year to date, the expectation is for a modest gain for the year as a whole compared to 2000.

"Sales of new homes could hit a record this year," Smith said.

On Friday, the NAR announced that sales of existing single-family homes declined 4.2 percent in April to a seasonally adjusted annual rate* of 5.20 million units from a level of 5.43 million units in March. Last month’s sales activity remained 4.4 percent above the 4.98-million unit pace in April 2000.

Dr. David Lereah, NAR’s chief economist, said, "Existing-home sales are coming off of the second-highest month on record, and remain above forecast levels. The recent surge of activity results partly from a bottoming-out of mortgage interest rates during the first quarter, and even if sales moderate in the months ahead we’re still expecting total sales this year to be the second-highest on record."

Concerning the dip, Lereah said, "Last month’s drop may not be a yellow flag, but it could be a concern that housing activity has topped out. Every time the Fed has cut short-term rates, long term interest rates have not declined – so they need to continue their accommodative policy."

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 7.08 percent in April, up from 6.95 percent in March. Last year in April, the mortgage interest rate was 8.15 percent.

All eyes will be on mortgage interest rates, but NAR President Richard A. Mendenhall warns that mortgage interest rates aren't the only indicator.

"Other factors contributing to high home sales include strong household formation and relatively low unemployment – most people have good jobs and remain confident in their own future," he said.

Published: May 30, 2001

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