Will rising interest rates, prices chill N.H. housing market?

Mortgage interest rates are rising, but the average selling price of a New Hampshire home remains among the highest in the nation. Single-family home building permits are being issued at a brisk pace, but the need for affordable housing is as severe as ever. So is all this good news or bad news for the state’s housing market?

Among people in the real estate and construction industries, the consensus is favorable. They see the healthy trends of the last several years continuing, although there are some warning signs along the way – particularly when it comes to housing prices.

The housing market picture isn’t completely clear, but there are signs that a slight – emphasis on the “slight” — slowdown in 2004 – was ending as 2005 began.

According to Kendall Buck, executive director of the Home Builders and Remodelers Association of New Hampshire, the number of single-family housing permits issued in January 2005 is about 10 percent above the pace in January 2004. And while January multifamily permits are down 11 percent from the same period in 2004 , the total number of residential housing permits issued in January 2005 is up by 4 percent from the year before.

For the entire year 2004, according to Buck, single-family permits were down by 1.5 percent, to 6,480, from 2003. Multifamily permits were down by 4.4 percent, to 1,970, from 2003, and total permits were down by 2.2 percent, to 8,450, from 2003.

Apparently the pickup in construction may be in the area of the state where much of the housing boom has been generated in the first place.

According to economist Dennis Delay of the Workforce Opportunity Council, the number of permits is “up substantially” in the Manchester-Nashua region for January 2005, when 160 building permits were issued in the Manchester-Nashua region — a whopping 70 percent more than the 112 issued in January 2004. Statewide, however, the number of permits – 497 — was down about 7 percent in January ’05 as compared to the year earlier, when 535 building permits were issued.

The pickup in activity has been seen at The Stabile Companies in Nashua, one of the largest homebuilders in the state.

“I think most people would agree that the winter was fairly slow, both for new construction and the sale of or existing homes,” says N. Paul Soughley, president and chief executive officer of the firm. “But I would say in the last three to four weeks we’ve seen a steady, very positive increase in traffic, and we see absolutely no reason for that to change. We’re very optimistic.”

Interest rates

One of the biggest potential clouds on the horizon involves the possible increase in long-term interest rates, which remain low, although they are increasing. (Rates on 30-year, fixed-rate mortgages rose slightly above 6 percent for the first time in eight months in March.)

Delay said the interest rate picture “bears watching,” adding that he suspects “we have seen housing prices increasing faster than rates have increased, which tells me that there’s an interest rate premium built into homes. To say that another way, people have been able to get into houses that are probably more expensive than they otherwise would have gotten into because interest rates have been so low. If interest rates rise quickly, the effect could be profound.”

Indeed it could, said Buck of the HBRANH. In an address to members of his association last fall, economist Russ Thibeault of Laconia-based Applied Economic Research predicted that if interest rates rise by about 3 percent, the median price of a home that can be bought by a household today at $214,000 would drop to about $158,000.

“If rates rise abruptly, it could have a significant negative effect on sales pace and prices,” said Buck.

But the direction of interest rates shouldn’t have a negative effect on sales in the immediate future, according to Soughley and, apparently, others in attendance at the recent National Association of Home Builders convention.

“We were all down at the NAHB convention, and all of the economists there agreed that interest rates would go up, but they would have very little effect on house sales,” said Soughley, adding that it’s his view that homebuilders will try to alleviate increases in interest rates by “buying them down” – the way automakers offer incentives like rebates to entice buyers to continue to come into their showrooms.

From Elisabeth Picard’s vantage point, it’s apparent that the state’ s hot housing market continues to remain very, very warm, at the least.

While Picard – a labor market analyst who has been tracking real estate and construction activity for the state Employment and Labor Market Information Bureau – “’for sale’ signs are staying up longer, and I’ve seen ‘rent to own’ signs going up for the first time in a while, and people who are buying houses and selling houses say the process is taking longer. But people are still buying, and people are still selling.”

In fact, she said, she hasn’t seen “any huge drops” in construction or home-sales activity. “There’s nothing that I’ve seen in the data I’ve been looking at to say that things are slowing down.”

Picard said that “we can really tell over the next couple of months where the market is headed. Houses usually don’t sell very well in the wintertime, and they are still selling.”

Long-term outlook

A housing forecast for 2005 is one thing, a longer-term look at the market is quite another — particularly when home prices are factored in.

New Hampshire home prices have increased dramatically over the last 25 years – by more than 348 percent since 1980, the sixth-largest increase in the nation for that period, according to the Office of Federal Housing Enterprise Oversight. Since 2000, the state’s housing prices have increased by almost 75 percent – the seventh-largest increase nationally. In 2004, the pace seemed to be slowing down, relatively speaking, with a home prices increasing by 10.6 percent over 2003.

All that makes many people in and out of the construction and real estate industries nervous.

“While anecdotally, we hear from builders that they have quite a bit of work lined up we are concerned about the ability of the industry to meet the demand for housing in all price ranges over the foreseeable future in order to keep New Hampshire’s economy growing.”

According to Buck, a recent Brookings Institution report predicts that New Hampshire will require 34 percent more housing units between 2000 and 2030 to keep up with the projected increase in population — a sustained average annual production of 8,700 units per year.

But building the homes is one thing – paying for them is another, said Buck, and that has already had an effect on the state’s businesses.

“It is an absolute fact that New Hampshire businesses are beginning to feel the effects of the housing availability issue for their workers,” he said. “Forum after forum and report after report indicate that workers are not coming to New Hampshire due to high housing costs, opting to take jobs in other states. They’re moving out of New Hampshire for the same reasons, and/or they’re commuting longer and longer distances to their work.”

“We’ve had many years now of housing prices increasing pretty quickly with no commensurate increase in incomes,” said economist Delay. And that, he added, is “really the heart of the issue of the affordable housing problem.”

Buck and others in his industry say the risks of escalating home prices are clear – and so are the solutions.

“Unless public policy changes to foster a ‘smart growth’ approach to allowing this market demand to be met, we will continue to see an escalating of prices,” he said. “That is, as the supply continues to be artificially restrained by communities enacting growth moratoria, limits on the number of allowable permits, coupled with ill-advised impact fees, exactions, and large lot zoning the prices will continue to escalate.”

Housing affordability trends in New Hampshire are disturbing, to say the least.

For instance, a report issued by the National Low Income Housing Coalition, New Hampshire was the 10th least affordable state in the country when it comes to rents. And what’s called the “housing wage” – the amount of money a person or family has to earn to afford a two-bedroom apartment by paying no more than 30 percent of income — was $16.79 an hour in 2004.

In New Hampshire, according to Buck, “an extremely low-income household (earning $20,343, 30 percent of the area median income of $67,809) can afford monthly rent of no more than $509, while the fair market rent for a two-bedroom unit is $873.”

Buck said a single person earning minimum wage – $5.15 per hour — can afford monthly rent of no more than $268. The fair market rent for a one-bedroom unit is $703, he said.

“Increased demand, coupled with decreasing supply caused by public policy restricting the market, will only cause prices to continue their upward trend,” said Buck, “thereby becoming out of reach
of more New Hampshire families.”