THE FEDERAL RESERVE BOARD RAISED its target for the federal funds rate a quarter of a point, but its action did not lessen home buyers' enthusiasm. Economists and builders predict that the industry will continue along its strong path through the end of the year.
The mortgage market had absorbed the widely anticipated rate increase prior to the Fed's June 30 move, says Doug Duncan, senior vice president and chief economist of the Mortgage Bankers Association (MBA). Rates on 30-year fixed mortgages began to slowly increase earlier this year, hitting 6.32 percent during the week of June 17; the one-year ARM rate rose to 4.19 percent the same week, according to the Freddie Mac weekly mortgage survey.
That the rates dipped—30-year rates to 6 percent and ARMs to 4.02 percent—was a surprise, which Duncan attributes largely to the poorer-than-expected June labor report.
Duncan forecasts that the 30-year rate will rise to about 6.5 percent by the end of this year. Economic growth hovering around 4 percent is controlled enough not to force rates much higher, he says.
In the meantime, home buyers continue to take advantage of the historically low mortgage rates. In fact, mortgage applications jumped 19.5 percent the week the Fed raised its rate before posting slight declines in following weeks, and MBA says lenders will book about $2.5 trillion in mortgage originations this year. That's down from 2003's record of $3.8 trillion, but the steep decline in refinancings accounts for the drop, economists say.
Slowly rising rates don't worry builders, either. “Rates are at 20-year lows,” says Antonio Mon, CEO of Hollywood, Fla.–based builder Technical Olympic USA. “It's unreasonable to expect interest rates could stay that low.” Mon expects the availability of different types of mortgages, particularly hybrid ARMs, to help buffer against rising fixed rates.
What's more, Mon says he's comfortable with the Fed's expected incremental rate hikes because they won't jolt the company's customers, most of whom are first-and second-time move-up buyers.
As discretionary buyers, however, they are susceptible to fluctuations in consumer confidence. Fortunately for builders in Mon's position, those numbers are strong, buoyed by consumers' beliefs that the job market has turned around, says Ken Goldstein, an economist with the Conference Board. “Low inflation, higher consumer confidence, and slowly rising interest rates make for a stable environment,” says Mon. “Most builders ought to do well.”