Rates, Chain Store Sales Support Economy

Wed Jul 7, 2004
By Kevin Plumberg

NEW YORK (Reuters) - The U.S. housing market flexed its muscle last week and shoppers opened their pocketbooks heading into the July 4th weekend, reports showed on Wednesday, tempering concerns about slowing economic growth.

New applications for mortgages jumped in the week ended July 2 on a sharp decline in mortgage rates, pushing up by 19.5 percent the Mortgage Bankers Association's market index, a seasonally adjusted measure of mortgage activity, to 687, its highest level in nearly two months.

The Washington trade group's purchase index, a gauge of new loan requests for home purchases, rose last week by 15 percent to 500.9 -- the index's second highest level ever.

Analysts pointed to the housing index as another sign the economy is still growing overall, despite recent news that jobs growth in June fell below expectations and that second-quarter consumption is likely to fall short of first-quarter levels.

"We have a pick up in the economy and a drop in rates. It's ideal for the housing market," said David Berson, chief economist at Fannie Mae (FNM.N: Quote, Profile, Research) , the largest housing finance company in the country.

Meanwhile, chain store sales recovered somewhat in the final fiscal week of June. Sales nudged up 0.9 percent in the week ended July 3, up from the 1.2 percent decrease in the previous week, the International Council of Shopping Centers and UBS said in a joint report. Compared with the same week a year ago, sales increased 4.4 percent, slightly up from the 4.2 percent growth pace of the preceding week.

"Sales recovered partially from the prior week's decline as consumers geared up and began to celebrate the long holiday weekend," said Michael Niemira, ICSC's chief economist and director of research, in a statement.

Stock investors largely ignored the news, as the Dow Jones Industrial Average began the session down slightly. Bond investors concentrated on an auction of $15 billion of U.S. government debt scheduled for later on Wednesday.

Home buyers rushed to close deals on their houses as mortgage rates retreated over the past three weeks, contributing to the spike in mortgage activity. Interest rates on 30-year mortgages, the mostly widely held type of home loan in the United States, sank below 6 percent for the first time since mid-April, the Mortgage Bankers Association said.

However, economists warn that the housing market could weaken once mortgage rates continue to rise.

"The current strength in home buying is likely to sustain residential construction through Q3," said Steven Wood, an economist at Insight Economics, in a research note. "If mortgage rates resume their upward climb, mortgage applications are likely to retreat, especially for refinancing," he said.

Analysts also see potential stumbling blocks for consumer spending this summer.

Redbook Research, an independent company, forecasted chain store sales would slip in July compared with the same period last year, to 4.0 percent from 4.2 percent in June.

Retailers traditionally slash prices on summer items in July to restock for the fall.

Also, the report said the U.S. Coast Guard has begun to detain vessels failing to comply with a new security code, which took effect July 1.

"The code raised some concerns among importers and retailers about the potential disruption and delay of imports for back-to-school merchandise," the report said.

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