Market crash's silver lining Scared investors buy bonds, which drives mortgage rates down

'They were paper losses'

Lengthy bull market has eased sales of high-end houses

November 02, 1997|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

The roller-coaster ride on Wall Street last week may have left some investors queasy, but it apparently did little to frighten the real estate market, and in fact, may have helped buyers.

It also showed the difference between how agents interpreted the market when comparing last Monday's 554-point drop to the 508-point fall on Black Monday in 1987, when the market lost 22 percent of its value.

"People were panicked in 1987. They were on the edge," said Tom Champion, of Ryland Mortgage in Lutherville. "This was like a nonevent."

But what was eventful was last week's drop in mortgage rates caused mainly by the activity in the market.

The Freddie Mac 30-year, fixed-rate average mortgage dropped to its lowest mark since February 1996, hitting 7.21 percent. On Feb. 16, 1996, it sank to 6.94.

"As stocks fell, investment money poured into the bond market, causing interest rates to fall," said Freddie Mac chief economist Robert Van Order. Interest rates and mortgage rates are tied to the Treasury bond market and go lower when bond yields drop.

According to Paul Havermann, vice president for HSH Associates, a New Jersey firm that surveys mortgages nationwide, Baltimore-area rates dropped slightly from 7.39 on Oct. 24 to Friday's mark of 7.34.

Those shopping for a mortgage "definitely would have benefited," Havermann said, adding however that, "the question is, will people recover their confidence and start to get out of safe -- but not terribly profitable -- bonds and back into stocks?"

The answer is that momentary swings in the stock market apparently don't seem to have an adverse affect on a buyer's position, even if the buyer is relying on stock accounts to help in the purchase of a home.

"Even on the big deals I don't think a blip on the market is going to damage the business," said Beverly Rosen, manager of the Long & Foster office in Pikesville.

"A long-term slide might, but I didn't find in '87 that it had any effect other than the general chilling it had on the entire financial industry."

Karen Bisbee, an agent who deals in luxury properties for O'Conor, Piper and Flynn in its Greenspring office, agreed to some degree.

"There were a couple of people who were more upper-end who were more concerned," said Bisbee, who added that wealth made in the stock market has kept luxury home sales brisk.

"But I think everyone was going forward with the attitude that they had made such a tremendous sum of money that if there had been a mild adjustment, they were paper losses not money that they were going to the bank on," she said.

"We never give financial advice. If someone is closing and they are pending, they've got $220,000 in their account and they need $220,000 to go to closing, then obviously you are going to advise them to put it in some place secure, that is not subject to market fluctuation."

The point of removing funds that are earmarked for a new home from a volatile market is advice that Neil Sweren, of American Home Loan Inc. and past president of the Maryland Association of Mortgage Brokers, also highly recommends.

"It may be wise to move it. But keep in mind, we follow the paper trail. So if you move it, make sure that you keep track of where things are going and when," Sweren said.

"If you give me a stock statement showing all your portfolio and you are using that for closing, but now it has a zero balance, you need to show where you've opened up that savings account," he said.

"We follow the money where it goes in most of these loan transactions. It may add to the paperwork involved, but based on what happened Monday, it certainly could be worthwhile," Sweren added.

But Champion of Ryland Mortgage said some of his clients have used margin accounts -- where investors can borrow a percentage against their stock -- as a strategy in purchasing a high-end home.

"The high-end buyer is using his asset account for leverage," Champion said. "But he's a sophisticated buyer, and investor. They know what they are doing. They have the accountants, their attorneys that tell them exactly what to do and have the assets to work with."

Champion said the buyers look for additional gains in the market to repay the loan. The downside is that when the market falls -- as it did Monday -- a buyer's portfolio shrinks. A margin call is put out and the investor is responsible for making up the difference.

Even so, Champion said that when an applicant is using stock as part of a down payment, that he also advises them to reduce risk by moving the funds into a more conservative account.

"It's not that I'm telling them what to do, but I am giving them a checklist of what can and can't happen. I make it very clear, that if you don't have enough money to go to closing, I can't close the loan," he said.

Yet Champion, as well as Rosen of Long & Foster, seemed unfazed by last week's events. Said Rosen: "As long as the economy is generally good, we have low inflation, our business can sail along pretty easily without being affected on a day-to-day basis by these kinds of things."

Pub Date: 11/02/97

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