Analysts Expect Housing Report to Reveal Increase for Last Month

"We think the odds are good that a national recession will be avoided," said Cathy Minehan, president of the Boston Federal Reserve Bank.

By Katherine Hobson

Bloomberg Business News

WASHINGTON _ Housing construction likely will post a second consecutive small increase last month as lower mortgage rates were enough to overcome bad weather and the slowing economy.

The Commerce Department will release the May housing report today, and analysts surveyed by Bloomberg Business News expect starts to show a rise of 0.9 percent. Starts increased 0.4 percent in April, breaking a string of three monthly declines.

Still, while lower long-term interest rates are helping housing markets, builders say starts of construction this year will fall short of 1994's total of 1.457 million unless consumers become convinced the economy isn't spiraling into recession.

"It's nothing tremendous, but the phones are ringing again," said Ted Mahoney, president of Windjammer Construction in Sherborn, Mass. "We're just hoping the Fed lowers the short-term rate just a little bit" to inspire consumer confidence in the overall economy.

Builders aren't the only ones betting on a Federal Reserve interest rate cut. In financial markets Monday, U.S. Treasury notes and bonds rose after recent comments by Fed officials _ including Fed Vice Chairman Alan Blinder _ sparked renewed optimism the central bank will cut the rate on overnight bank loans at its next policy-setting meeting on July 5 and 6.

Another Fed official, though, indicated Monday in remarks before the Cape Ann Chamber of Commerce in Massachusetts that she sees no need for an immediate rate cut.

"We think the odds are good that a national recession will be avoided," said Cathy Minehan, president of the Boston Federal Reserve Bank. Declining long-term interest rates, rising personal income and business investment, and a declining U.S. dollar bolstering production and exports of American goods will all help avert a recession, she said. Minehan estimated the economy would grow at about a 2 percent rate during 1995.

In late New York trading, the benchmark 30-year government bond rose 23/32, pushing down the yield more than 5 basis points to 6.56 percent. Stocks surged, meanwhile, with the Dow Jones Industrial Average rising 42.89 points to a record 4553.68. The dollar was lower against the yen and the deutsche mark.

The Fed has raised interest rates seven times since early last year in an attempt to curb a burgeoning economy enough to contain the threat of inflation.

As a result of slower growth, mortgage rates have moved steadily lower after peaking at 9.25 percent in mid-December. The average rate on a 30-year fixed loan fell to 7.96 percent during May from 8.32 percent in April, putting put the average monthly payment on a $100,000 loan at $730.98 last month, down from $756.19 in April.

Last week, the average mortgage rate inched up to 7.55 percent from 7.51 percent during the previous week.

Even with lower rates, however, housing activity remains subdued. "The combination of slowing job growth and stagnant incomes is causing people to be cautious," said Dan Mercer, an economist with the National Association of Home Builders in Washington.

The economy shed more than 100,000 jobs during May, the second consecutive monthly decline, with the construction industry alone reporting a loss of 57,000 jobs. That decline was tied in part to heavy rains in parts of the South and Midwest that held back construction.

Moreover, consumers may be too strapped to take on more debt. Late payments on installment loan accounts rose in the first quarter to a 1.82 percent rate from 1.72 percent in last year's final quarter, the American Bankers Association said Monday.

Even if consumer spending does bounce back, there's a considerable inventory of unsold homes that builders need to work off before new construction can take off once again.

"We've got some pockets of areas that are overbuilt, especially in the upper price ranges," said Rick Porter, president of Richport Properties in Tucker, Ga. "There's a certain amount of caution in the market to keep (inventories) from getting out of line."

A consumer-driven rebound could bring annual housing starts to about 1.3 million, down 10 percent from 1994 but about equal to 1993's levels, according to NAHB economist Mercer.

According to a monthly survey released Monday by the NAHB, about 27 percent of builders expect home sales to be good during the next six months, up slightly from 26 percent in May. The trade group's monthly survey also found that 24 percent of those surveyed see good sales so far this month, up from 20 percent in May.

Another early positive sign for the housing market: mortgage applications rose 9.2 percent last week, according to the Mortgage Bankers Association market index.

"People have been sitting on the fence," said Mahoney, but lower rates and relatively low prices should tempt more consumers into the market for homes later this year.

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