- The Washington Times - Monday, May 3, 2004

A near 40-year low in interest rates drove housing and highway construction to record highs in March, in what may be the swan song for the long boom in housing.

The low rates, which touched close to 5 percent during the month for 30-year mortgages, helped raise home affordability to its second-best level in three decades, while a projected return to surpluses in state and local budgets helped unleash pent-up highway projects, according to separate reports yesterday from the Commerce Department and the National Association of Realtors.

The housing and construction market has been especially strong in the Washington area, where a scarcity of homes for sale has driven up by double-digit rates the prices paid by panicky buyers in recent years.

The rush to take advantage of rates when they hit their March lows pushed up spending on residential construction nationwide by 0.7 percent to $507 billion, a record high, according to the Commerce Department.

Although economists do not expect the housing market to crash after five years of frenetic growth, the jump in mortgage rates to more than 6 percent currently is expected to cool sales and — in a relief for many buyers — put a lid on price gains in the future.

“Although mortgage interest rates have risen in the last month, housing affordability conditions remain favorable,” said David Lereah, chief economist of the National Association of Realtors.

“There are some challenges in the more expensive markets, but on balance, most households in the United States can readily afford a typical home.”

The group calculates that with a median income of $54,517, most American families can well afford to buy homes, despite a climb in the median price to $170,800 this year. The struggle is greater for first-time home buyers who, with median household incomes of $30,980, cannot quite afford the typical starter home costing $145,200.

In the Washington area, household incomes and house prices are nearly twice the national average. Washington’s median home price soared 12.9 percent to $292,100 last year, according to the real estate agents group.

News of the record high in construction spending helped lift the stock market yesterday, one day before the Federal Reserve meets and is expected to signal that it is moving slowly but steadily toward raising rates for the first time in five years.

Anticipation of a Fed move, with signs of a bottoming out of inflation, has driven the rates on long-term mortgages and bonds up sharply in the past month, and rates could climb higher depending on what the Fed says today.

The biggest casualty of higher rates has been the mortgage refinancing business, which is down 52 percent since hitting a peak in late March, according to the Mortgage Bankers Association.

The shutdown of refinancing activity removes an important prop for consumers that helped them get through the recession. Cash-out refinancings enabled homeowners to supplement income by extracting equity from their homes to spend on cars, college tuition and other items.

Partly because of the important role refinancings played in augmenting incomes and spending, Fed officials have signaled that they would not raise rates until they see evidence that jobs and incomes are growing solidly. The latest report on job growth is due out Friday.

Higher rates are not expected to be as much of a barrier to state and local spending on highway and mass transit construction, which got a boost in recent months as strong economic growth generated a rising tide of sales taxes and other revenue.

The National Conference of State Legislatures said last week that 32 states expect to have surpluses this year, a marked improvement from last year, when states collectively posted a record $78.4 billion in deficits.

A burst of highway spending in March helped push up construction spending nationwide by 1.5 percent to a record $944 billion, the Commerce Department said. Federal, state and local spending hit new highs, while spending on office buildings, plants and factories declined 0.2 percent.

Business spending on new structures has been weak since the 2001 recession and remains one of the only sectors that has not joined in the 2-year-old economic recovery.

The revival of another long-ailing sector was highlighted yesterday in the first official glimpse at how the economy performed last month. A report from the Institute for Supply Management showed that manufacturing activity stayed near a 20-year high.

“The manufacturing sector is getting a boost from both domestic and global demand,” said Ed Yardeni, chief investment strategist with Prudential Equity Group, noting that the institute’s indexes for orders, prices and employment are soaring.

“We could see the first monthly gain in factory payrolls in four years when April employment data is released on Friday,” he said.

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