Will Interest Rates keep home sales Bottled Up?

January 01, 1995|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

When the real estate pundits polished off their crystal balls at the end of 1993 and peered ahead, they saw stabilized mortgage interest rates, strengthened consumer confidence and healthy sales gains in Maryland's existing and new-homes markets.

A year later, it has become clear how less-than-perfect that vision may have been.

Mortgage interest rates, starting the year in the nearly record-low 7 percent range, shot up and kept climbing, ending up at 9.29 percent last week. A mortgage refinance boom tapered off after the first quarter but not before helping to deplete a stock of potential homebuyers.

Slow regional job growth and repeated increases in short-term interest rates by the Federal Reserve shook consumer confidence. Though home sales posted gains each month through June, sales began dropping off sharply each of the following months in the Baltimore region. For the first time in four years, home sales will probably decline. December's figures are expected this week.

The Sun -- with fingers crossed -- asked real estate experts to assess 1994 and look into their crystal balls toward 1995.

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4 Anil Kshepakaran, loan officer, Signet Mortgage:

At the beginning of the year, you saw a fair amount of people still refinancing their homes. Then rates began to increase. It wasn't advantageous to refinance. There wasn't as much resale going on because a lot of people were increasing their loan amounts. People who were planning to move decided instead to go ahead and refinance their homes.

Because rates had started to climb, we didn't see a boom during the fall. A lot of Realtors were amazed and taken aback by it, thinking they'd have a slow summer like in the past, but the fall should be better. That's when rates kicked in, and people could not qualify for a mortgage. Rates really put a damper on the resale marketplace.

The marketplace has now stabilized, ratewise. We might see another increase in the first quarter, but there is going to be some stability in '95. We see people coming out of their shells and making that purchase. I think they'll still lean toward the new homes market because of builder incentives that allow builders to contribute money toward settlement costs.

A lot more mortgage products are being designed for this rate environment, with a lot of crossbreeds between ARMS [adjustable-rate mortgages] and fixed rate, offering more stability but a lower start rate. That in itself has helped people buy homes.

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Michael A. Funk, assistant director, University of Baltimore's Regional Economic Studies Program:

It will be difficult for the first two quarters of '95 duplicating numbers we saw in the first two quarters of '94. The second half of the year might be the same as the second half of this year. There will be fewer sales overall in '95 than in '94. I'm not as optimistic as I used to be.

There are one or two reasons. The first, of course, is interest rates and anticipation over the interest rate hike at the first [Federal Reserve] meeting in mid-January. I also think part of it is a natural cyclical nature of home sales. The recession was followed by a big surge of buying when rates got low. People realized rates were up and would continue to go up. That's why we saw robust home sales in the early part of the year, and they tapered off significantly. Now, most people who were planning moves have made them. There is not quite the pent-up demand.

We've forecast an approximately 5 percent decline in housing starts, so that's a good indicator of residential housing sales -- flat to off by 5 percent.

It's pretty clear we're going to have higher interest rates. In the first two quarters of '95 we'll see an economic slowdown as a result of Fed policy, and once we see the economy slowing down, we won't see an interest rate increase in the latter part of '95.

I don't think it's going to destroy the industry. I think it will be a moderately down year for real estate but wouldn't say it will be a total washout.

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Keith T. Gumbinger, HSH Associates, which tracks mortgage rates:

We do think interest rates will be somewhat higher earlier in the year. The 30-year rate will peak at 9.5 percent, or a little more or less, at the latest before April, but then we're likely to see soft fixed-interest rates as the economy slows down a little bit. We will see reasonably higher rates early on with the overall rate over 9 percent for the majority of the year.

The rise in interest rates has meant a couple hundred a month [on a monthly mortgage payment.] Some people are sitting on the sidelines. That will continue until incomes catch up, housing prices fall off or interest rates fall.

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