The U.S. Commerce Department estimated that starts of new single-family homes declined 9.5 percent in June to 1.489 million, the lowest level of new starts since May 2003. Building permits also tumbled 8.2 percent to 1.924 million units, which is the steepest decline in permits in 10 years, with permits for single-family houses dipping 6.2 percent to 1.51 million.

That comes on the heels of slowing retail numbers, payroll growth and industrial output, but the news isn't all bad for housing. Equities markets are trading sideways, with investors still exhibiting uncertainty due to geopolitical pressures, higher oil costs, and a heavy reliance on Fed chief Alan Greenspan's direction for short-term interest rates. And the more uncertain people are, the more they like putting their money into real estate - especially in a lending environment treading 40-year rate lows.

The Federal Open Market Committee is anticipated to raise its overnight lending rate to 1.50 percent in August, which could cause bonds to tumble like they did earlier in July, and mortgage interest rates are closely tied to bonds. But when yields climb on the 10-year Treasury note, mortgage rates climb, too, and that has many worried that rising rates, coupled with rising home prices could leave homebuyers cold.

Greenspan seems willing to take the risk. He sees it all as only temporary -- from gas price increases to food costs to rising unemployment.

Appearing twice-yearly before the House Financial Services Panel on Capitol Hill, Greenspan submits his semi-annual report on monetary policy. Yesterday, he said in his report that he wasn't concerned about recent softness in the economy, but that low interest rates can't continue. The risks of tightening outweigh leaving low rates in place. He was confident that the economy is prepared for higher rates, and can even handle "less gradual" rate hikes should it become necessary.

On July 1st, 2004 when the Fed raised short-term rates a quarter of a point for the first time in four years, long-term rates (like mortgage interest rates) began to fall, because the rate hike was accompanied by a spate of bad news that indicated that the economy was already slowing. Then the stock market responded with a sell-off and sideways motion that left stocks returning as much of a third or more of their gains for all of 2004 between the Fed chief's appearances.

But the Fed isn't worried because the bankers believe they see an economy that is improving, but the wild card in all of this is what the consumer thinks. Housing sales can pull back or steam forward depending on consumer sentiment, mostly about jobs. If interest rates continue to drop, homebuyers will continue to jump in to take advantage and keep housing at its record pace, but not if jobs slow down.

People still need jobs to qualify for mortgages and to buy homes, and so far the Fed's predictions have been conservatively optimistic. The economy has grown about 4 percent in 2004 when about 4.5 percent was predicted, but the Fed expects the pace to pick up in the latter part of the year. Joblessness is expected to lighten from 5.6 percent to about 5 to 5.25 percent, and core inflation rates will remain about the same as they have, hovering at 2 percent annual rate of growth.

Meanwhile, the National Association of Realtors believes that existing home sales will hit a record 6.31 million this year, and that housing starts should grow by 2.6 percent to 1.90 million by the end of the year.

While home appreciation is predicted to be flat after adjusting for inflation, at least homebuyers can ride out the dead calm in nicer digs that they can buy with lower interest rates and adjustable-rate loans.

Published: July 21, 2004

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