Expect lower rate of gain in the value of homes

Nation's housing

September 30, 2001|By KENNETH HARNEY

WHEN TERRORISTS obliterated the World Trade Center and struck the Pentagon, what collateral damage did they do to one of the most vibrant segments of the American economy - housing?

That's a question not only on the minds of economists at the Federal Reserve. It's also of direct, practical concern to homeowners, buyers, builders, realty agents and mortgage lenders nationwide.

Did Sept. 11 toll the closing hours of the unprecedented housing boom of the past eight years? Did it signal an abrupt end to the impressive gains in home values we've seen since the mid-1990s, along with record home construction and sales, and huge conversions of home equity into cash for consumer spending?

Discussions with housing economists and capital market experts last week left little doubt: We are virtually assured of at least half a year of a recession or near-recession - low or negative economic growth, sharply higher unemployment, lower consumer spending and lower consumer confidence.

The country is putting its big discretionary spending decisions on hold - auto purchases, foreign travel, purchases of a second home and the like.

Americans already are using their credit cards less: Charges were down 20 percent in the days immediately after the attacks.

But what about home real estate? What about the refinancing that has powered the consumer side of the economy for most of the year?

Here the outlook is more complicated because one of the essential components - the price of money - is actually more favorable today than it has been in several years.

Mortgage interest rates neared two- and three-year lows at the end of last week - 6.86 percent on average for a 30-year fixed-rate mortgage with .90 "points," and 6.3 percent for a 15-year loan. (A point is a loan fee equal to 1 percent of the mortgage amount.)

Cheap mortgage money usually means party time for home sales, refinancing and appreciation rates. That ultimately may prove true again, but probably not for an extended period of months.

Robert Van Order, the chief economist for mortgage investor Freddie Mac, says he expects interest rates for 30-year loans to "remain below 7 percent" well into 2002.

But interest rates alone do not move houses. People need jobs and confidence to move, buy or sell. And employment and confidence are now virtually certain to be economic negatives for the months ahead.

Layoffs in the airline industry topped 100,000 last week alone. Some business economists predict 7 percent unemployment by the middle of next year, up from 4.9 percent currently and 4.5 percent a month ago.

So what does all this mean for home values? Here are a few thoughts:

Property values. In the radically changed economic calculus now taking shape, the rate of appreciation in home values can only decline. Note those words, however: It's the rate of gain that will be on the downswing, not necessarily the underlying values of homes from current levels.

Nationally, according to federal data, home values have increased at an annualized rate of 7.8 percent so far this year. That figure could easily drop by half in the months ahead, meaning the typical home would be appreciating by 3 percent or 4 percent. But values nationwide could still be rising.

Some markets that have seen double-digit appreciation in recent years but now are heavily affected by layoffs could see significant price declines by the end of this year. But in most of those markets the cooling cycle had already begun before Sept. 11.

Sales strategy. If you are selling now, or plan to in the near future, the name of the game is realistic pricing. Talk to several real estate agents about pricing, and beware of anybody who promises you big numbers and fast sales. No one's going to get big numbers again until local employment bounces back and consumer confidence polling numbers are up.

Buying strategy. No one wants to capitalize on economic hardship triggered by terrorism, but the fact is this: You should be able to buy a given home at a more moderate price and at a lower mortgage rate this fall than you could have this past spring.

Refinancing. If Van Order's crystal ball is accurate, mortgage rates should remain attractively low into next spring. For millions of homeowners, a refinance into the high 6 percent range is still a good bet - whether to lower monthly loan costs or pull out cash to pay off higher-cost debts.

Overall outlook. Take your cue from Federal Reserve Chairman Alan Greenspan. He told Congress last week that the underlying pillars of the American economy are sunk deep and strong. The real estate economy is cyclical, to be sure, but it is strong and sunk deep.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C., 20071. Or e-mail him at kenharney@aol.com.

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