Despite the Federal Reserve's decision to keep raising rates to slow the economy, the housing market does not seem to be heeding its words.

Existing home sales rose 6.7% for the month of February to a seasonally adjusted 4.75 million units. This is coming off January's numbers, which showed housing sales at a two-year low. New home sales also beat expectations, slowing less than 1% to an annual rate of 919,000 units.

Although these numbers are strong, 2000 is not expected to be a record year, as the last two have been. The large increase over January's numbers was due to the significant drop in January.

"Most people had been expecting a slowdown this year, but they were expecting one last year too," said Robert Van Order, chief economist for Freddie Mac. "I think, actually, it's more likely to go up a little bit, not to last year's level, but maybe to go up a little bit and sort of stay at some level that's below last year, but still pretty good."

However, Fred Flick, vice president of research for the National Association of Realtors, has suggested that the small slowdown seen is in some part an effect of the Fed's tightening.

"As soon as the Fed started pushing rates up in the spring, the raw numbers and the seasonally adjusted numbers just started dropping down," he said. "And I think they especially affected the markets in outlying areas, where people's income growth may not be that high and they're not willing to switch to adjustable-rate mortgages to buy the house, so you have some deals not going down because of that phenomenon."

Flick sees the Fed continuing to tighten, and expects the overall housing market to be down by 8% to 9% for 2000.

Rates Hold Steady, For Now

Van Order also attributes the strong housing sales to a small stabilization in the mortgage rates, which have been hovering near 8.25% for the past few weeks. "The economy is still strong, and we're still seeing strong applications for purchase," he said. "So, it certainly seems to the case right now, that while home sales are indeed slowing down, they're still pretty strong."

Jonathan Raiff, a mortgage strategist for PaineWebber, said that the Mortgage Bankers Association's Purchase Index is also surprisingly robust. Last week, the index jumped to 312.2 from 293.5. "That was the highest reading on the purchase index since last July," he said. "It's definitely been pretty strong. I think that's been the big surprise. You've got housing starts and existing home sales being very robust despite the back up in mortgage rates."

Raiff said that the wealth effect created by the stock market has in some part offset the higher interest rates, making the market difficult to forecast. "At some point, you will have a lock-in effect, because higher rates reduce housing affordability," he said. "And if housing affordability drops lower than income grows, you would have to see a higher level of lock-in exhibited."

Toward the end of the year, Flick sees mortgage rates jumping to about 8.5%, but will remain about an eighth of a point in either way from current levels in the short term. "When you get inflation-rate reports that are good, the bond prices tend to go up and the rates tend to bounce down a little bit," he said. "So they vary with the news. You can see them jumping around as the various indicators are released."

As for whether a refinance wave is imminent, that answer is a resounding "no."

"To get a significant increase in refinancing, you'd have to get rates to get back to well under 8%, and probably close to 7%, because lots of people refinanced at 6.5% and 7%," Van Order said.

"The refi wave, that's probably a couple years away," added Flick. "I think that if indeed we do see some kind of recession in the next couple of years, the refis will [happen] once the rates get down and hit bottom."

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