Hammering All Over the Land

By Barbara Rudolph.

When the builders of the Society Hill development in Peekskill, N.Y., announced last month that they would soon be selling 91 new condos at prices ranging from $98,500 to $140,000, the response from local residents was immediate and intense. People with sleeping bags started lining up outside the development's office six days before the first applications were to be given out. Soon the crowd swelled to 200, and the police had to be called in when several people tried to skip to the head of the line. Says Society Hill Developer Ara Hovnanian, a major builder throughout the Northeast: "We've been in the business for 26 years, and we've never seen anything quite like it."

Nor have many other home builders. From coast to coast, the housing industry is flourishing like crabgrass. The U.S. Government reported last week that sales of new homes surged by 27.4% in March, to an annual rate of 903,000, the highest level on record. In many areas, including California's San Fernando Valley and the suburbs of Boston and Chicago, houses that come on the market are sold within days or even hours. The cause of all the commotion is clear: mortgage rates have fallen to an eight-year low. Interest on fixed- rate loans is as little as 9.5%.

Buying activity is greatest among individuals and families who already own homes; they represent more than 60% of the population. Many hope to move up, as the brokers put it. Translation: they want a more expensive house with more space or more status. Emily and Bill Jones aim to step up from their three- bedroom ranch house in Marietta, Ga. Says Emily: "We are building something bigger, better, newer." Developers are responding to the demand. A survey conducted by the National Association of Home Builders reports that about 80% of all builders plan to begin constructing homes for the "move-up market" this year, compared with 56% in 1985.

First-time buyers, though, are as eager as they come. Richard and Shirley Brownstein have spent the past three years looking for an affordable house in a Chicago suburb while they lived with their two sons, 6 and 3, in a two- bedroom apartment. When interest rates tumbled, the couple was finally able to swing a mortgage and buy a home. In July they will move into a three- bedroom ranch house in Woodridge, Ill. (price: $90,000). Says Richard, a credit supervisor for J.I. Case, a farm-equipment manufacturer: "If we didn't buy a house this year, we wouldn't do it."

The swelling demand is pushing up prices in many places. The median price of existing homes jumped $2,600 in March, to $80,000, up 7.2% from the same month last year. The steepest increase came in the Northeast, where the median price hit $101,300, a 16.7% rise over 1985. Prices are falling in depressed regions like the oil patch. In the Houston area, the median home price dipped about 12% during the past year. One reason: home foreclosures in Houston have reached their highest level in 20 years.

Many homeowners who do not want to move are besieging bankers. Since the interest on a 30-year fixed-rate mortgage now averages 9.9%, down from 13.07% a year ago, people are scrambling to refinance their existing loans. The decline in rates during the past year means that consumers have a chance to save about $200 a month in payments on a $100,000 mortgage. The dramatic drop in interest rates has caused home buyers to reconsider what kind of mortgage they should assume. When interest rates were high, as they were for most of the decade, many consumers had little choice but to hope that rates would soon fall. Buyers assumed adjustable-rate mortgages, in which payments move up and down along with current interest rates. Today many consumers want to lock in low rates. In August 1984, fixed-rate loans represented only 32% of all new mortgages. Now their share is up to 70%.

Lenders report that some consumers are so intent on getting the best possible interest rate that they delay closing a deal to wait for one more dip. Says George Engelke, executive vice president of Astoria Federal Savings in New York City: "It's good, old-fashioned playing the market."

Many lenders are finding it difficult to manage the sudden growth of their business. At San Diego's Home Federal Savings & Loan, mortgage applications are running at nearly five times the normal volume. Boston-based Commonwealth Mortgage is processing $40 million a week in mortgages, more than four times last year's level. Many banks that usually process a loan application in three weeks now require up to two months. Another problem: a shortage of real estate appraisers, who are needed to approve loans.

Experts expect that the housing spurt will continue at least through the end of 1986. The National Association of Realtors predicts that new-home sales will reach 735,000 this year, up from 688,000 in 1985. But that level depends largely on interest rates remaining close to their current level. Many consumers fear that these rates are too good to last. Says George Pierce, a real estate agent for Coldwell Banker in Oak Brook, Ill.: "People are saying, 'I may never see this again. Now is the time to make my move.' "

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With reporting by Gisela Bolte/Washington and Betsy Kraft/Chicago