- The Washington Times - Friday, May 19, 2000

Location may be an important factor on whether or not a home sells quickly, but the overall market trends in sales are determined by other factors such as supply and demand and the state of the economy.
On Tuesday, the Federal Reserve voted to raise short-term interest rates to 6.5 percent (the highest in nine years) from 6 percent to stay in line with its long-term goals of price stability and sustainable economic growth.
The Fed remains concerned that increases in demand will continue to outpace supply. This could lead to inflation, which could interrupt the economy's record economic growth.
"The Fed's intention is to slow housing market activity," explains Doug Duncan, chief economist at the Mortgage Bankers Association (MBA).
The housing market is an important segment of the overall economy, making up 15 percent to 25 percent of the gross national product, Mr. Duncan says.
The Fed looks at the housing market as an indicator of the overall economy and raises interest rates with the expectation that the increase will slow housing to keep inflation under control, he says.
The mortgage industry has been anticipating a rate increase. The average mortgage rate was 8.48 percent the week ending May 5, up from 8.35 percent the previous week, Mr. Duncan says. He expects to see more mortgage-rate increases.
Nevertheless, the MBA's weekly survey of application activity showed an increase in the number of loan applications nationally last week, Mr. Duncan says. MBA attributes this heightened activity to buyers anticipating an increase in rates.
Rising interest rates may not affect the Washington-area housing market. The supply of houses is low and demand is high, fueling increasing home prices.
"The Washington housing market is very hot right now," says Peter Chinloy, professor of finance and real estate at American University. "Any hike in interest rates will not affect it."
When there is high employment, people will buy at higher interest rates, says John Glascock, an Oliver T. Carr Jr. professor of real estate finance at George Washington University. When a person's income is going up, he tends to move up in housing or renovate.
Normally, three factors help determine when people buy homes: interest rates, employment and income, Mr. Glascock says.
"When employment is strong and income high, people will continue to buy housing, even when there is an increase in interest rates," Mr. Glascock says. They may, however, buy smaller homes or put down less money, he says.
Also, buyers sometimes change the terms of their mortgages, Mr. Glascock says. At lower rates, buyers will try to take 15-year mortgages, he says, as they did several years ago. As rates increase, with strong employment and strong income, people will continue to buy homes, but will get 30-year mortgages and maybe slightly smaller homes, he says.
More important, Mr. Glascock says, is the shortage of inventory, particularly in Northern Virginia. Sales may be down this year, but it's not because people don't want to buy, he says.
The tight supply and surging demand is driven mostly by the influx and growth of high-tech companies. There are many more buyers than sellers, Mr. Chinloy says, and many of those buyers are paying cash, at least at the upper end of the market.
"We have the lowest inventory we've had in decades," Mr. Glascock says. "We're down to about two to three months inventory. That tends to pull up prices."
Normally, buyers have six to 10 months of inventory from which to choose, Mr. Glascock says.
If the economy stays healthy in general, prices will continue to rise, Mr. Glascock predicts. If the high-tech area in Virginia and the number of government-related jobs continue to grow, prices will increase even more in this area, he says.
People living in Northern Virginia's high-tech corridor will be more affected by the Nasdaq, Mr. Duncan says.
The Fed also is looking at the stock market, which projects willingness to spend, Mr. Duncan says. Currently, the Nasdaq is down. A continued downward drive will reduce the Fed's pressure to slow the wealth effect on people's spending, he says.
Even with prices escalating, people still want to buy homes because they are worried about prices rising even higher in the next two years, says Mr. Glascock, adding that they see these prices as low compared to the future.
Higher interest rates affect first-time home buyers. Those at the upper end have cash from the sale of a house and are cashing in stock options, Mr. Chinloy says.
But even first-time buyers may not be affected. The most important factor for the mortgage industry is the 10-year Treasury note, Mr. Chinloy says, which is yielding 6.5 percent currently. Mortgages are typically 2 percentage points higher than the 10-year Treasury and are at 8.5 percent now.
The Fed rate, on the other hand, is short term. When it is raised, it increases short-term rates, Mr. Chinloy says. Therefore, it may not affect mortgage rates, he says.
The connection between the movement of short- and long-term rates is not always that tight, he says. But if there is upward movement, mortgage rates could be bumped from 8.5 percent to 9 percent.
The National Association of Realtors (NAR) built into its current forecast an assumption that the interest rate will be 8.4 percent for the year, says Fred Flick, vice president of economic research at NAR. The group is optimistic rates will drop to the low 8-plus percent range by the end of the year, thanks to a housing market that has been slowing nationwide since last spring.
How high would interest rates have to rise to see a local impact? If people believe higher interest rates are a signal the economy will slow or some people will lose jobs or wage increases will slow, then housing will slow, Mr. Flick says.
But if people think their incomes will rise or if they think housing prices will rise, they'll live tight for a few years to benefit from the inflation, Mr. Glascock says.
Ultimately, interest rates don't drive the housing market as strongly as the other two factors jobs and income, Mr. Glascock says. If the high-tech corridor slows down, and those corporations bring in fewer workers, that will slow the housing market, he says.
"At some point, [the market will slow]," Mr. Duncan says. Rates may get as high as 9 percent by year's end, according to MBA predictions.
"But we're still looking for a very good year," Mr. Duncan says, noting that 2000 could be the fourth largest year on record.
But Mr. Duncan thinks the increase will affect pocketed areas around the Beltway. It will lengthen the time it takes to sell properties or sellers will lower their prices, he says. As a result, home sales and price appreciation will slow, and inventory will grow to five or six months, he says.
There are many loan programs available that may help compensate for an increase in interest rates, Mr. Duncan says. He advises buyers to shop around, noting that this may not be the time to buy.
For some people, it may be more advantageous to wait. Economies are cyclical. Exercise the option that makes the soundest financial sense, he says.

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