Housing sales remain strong in May

WASHINGTON — The numbers from May show that the housing market remains one of the economy's more resilient areas.

Sales of both existing and new homes headed northward during May. Resales gained 2.9 percent over their April level, finishing at 5,370,000 units on a seasonally adjusted annualized basis. New home sales pushed up 0.8 percent, finishing May at 928,000 units on the same basis.

Housing starts remained at a high level, even though they slipped in May by 0.4 percent to 1,622,000 units on a seasonally adjusted annualized basis.

The big winner from all of this data was affordability, in the form of the low interest rates that have prevailed since the Federal Reserve began hacking away at the prime rate. The national average for a 30-year conventional fixed-rate mortgage in May was 7.15 percent — up slightly from April but down nearly 140 basis points from May 2000.

"Demand is still very high, interest rates remain close to historic lows and many people are confident about their own economic future," said David Lereah, chief economist for the National Association of Realtors.

So good were resales that they beat many economic analysts' expectations. Robert Podorefsky, analyst with Fleetmarkets, said the signs were all good with respect to resales: They had risen in May even compared with an upward-revised total for April; plus, Podorefsky noted, inventories fell in May to a 3.4-month supply, 6.1 percent below the April level. "It shows that there are pockets in the economy that have received traction from the Fed's aggressive easing," he said.

"Both (sales) reports underscore that the real estate market — and, by extension, the construction industry – has been the brightest sector in an otherwise increasingly gloomy economic picture," said David H. Resler and Carol A. Stone, economists with Nomura Securities. Noting that average mortgage rates have begun to rise, however, "the prop from falling mortgage rates has vanished, and the strength of sales recently suggests the usual rush to close when rates start rising again has already occurred," said Resler and Stone.

Noting the slip in starts, Bruce Smith, president of the National Association of Home Builders, said, "The housing market continues to outperform our expectations, even more so considering the ominous signs in other sectors of the economy." Smith did predict that housing would slow down, however, especially if the job picture continues to appear wobbly.

Bruce Steinberg, chief economist with Merrill Lynch, agreed with Smith when he said, "We assume some softening of the housing market will set in, but there is little evidence of that at present. Despite a weak job market, mortgage applications for home purchases were actually at a record level" in the four weeks leading to mid-June.

For now, noted David Orr, chief economist for First Union Economics Group, "housing, while not really growing, is clearly providing a shield against full-fledged recession." The fact that May starts were close to their April level "provides a much-needed sense of stability" for the economy.

That stability has provided a spark of confidence among builders, judging from the NAHB's most recent housing market index. In June, the index rose to 58, up two points from May, and Smith characterized the builders' attitude as "remarkably upbeat."