- The Washington Times - Wednesday, October 8, 2003

Chicken Little was credited with saying, “The rates are rising, the rates rising,” or words to that effect.

Bits of economic news are falling from the sky, and real estate investors and purchasers should pay attention if they are seeking to grab cheap money for their next home purchase or investment.

David Lereah, chief economist with the National Association of Realtors, recently warned a group of industry leaders to watch out for federal budget deficits. Though the housing market should remain strong in the immediate future, the deficits could mean higher interest rates, which could dampen real estate activity. Meanwhile, the U.S. Department of Commerce reports the latest gross domestic product is outpacing earlier predictions.

Here are some highlights:

• The pace of expansion in the second quarter more than doubled compared with the two preceding quarters.

• Forecasters anticipate annualized gross domestic product growth beyond 4 percent for the next two quarters.

• Defense spending increased 45.8 percent, contributing to strong growth, and should continue to do so as U.S. involvement in Iraq and other countries continues.

• Consumer spending increased at an annual rate of 3.8 percent for the second quarter — almost double the first quarter’s 2 percent.

When you consider that consumer spending makes up 66 percent of national economic activity, that last figure is very significant.

These are the economic signs that home sellers and buyers should look for to help time their purchase or sale so they get the highest return possible on their real estate investment.

As with transactions in the stock market, in real estate, you want to buy low and sell high. If you must purchase when prices are on the upswing, you want to get into it with as little as possible out of your pocket and with the cheapest money available. This means you are seeking a low interest rate.

Low interest rates have buoyed the U.S. housing market through the latest economic downturn. In addition, it appears that new home sales are headed to another record for 2003, according to Mr. Lereah. In comments at the Rismedia.com Leadership Conference in New York this week, Mr. Lereah said 2004 should be the third-best for real estate in history. Rismedia is part of the real estate media conglomerate that publishes National Relocation and Real Estate magazine, a widely distributed industry publication.

Mr. Lereah warned the assembly of 1,000 real estate professionals that mounting deficits could hurt the real estate business after years of record-breaking sales.

“The biggest negative is the budget deficit,” Mr. Lereah said. “That’s the only thing that I can see right now that can hurt real estate.”

He noted that the federal deficit has hit almost $400 billion and could be $500 billion by the end of 2004.

“That’s on a road to $1 trillion. … That’s not pretty,” Mr. Lereah said.

For another line of statistics, look over what happened to interest rates the last time we came out of a recession.

Visit the Federal Home Mortgage Corp. (Freddie Mac) Web site’s 30-year mortgage historic statistics (www.freddiemac.com/pmms/pmms30.htm), where you can watch the ebb and flow of rates as the economy ekes up and slips down.

In the late 1990s and into the 2000s, when the Federal Reserve was afraid of an overheated economy, the rates jumped to more than 8.5 percent.

That type of increase can knock you out of the house of your dreams pretty quickly. As an example, for a $200,000 mortgage at 6 percent — where the 30-year fixed rate is hovering at the moment — the principal and interest payment would run $1,199.10, vs. $1,537.83 at 8.5 percent. That’s $4,065 more in payments per year for the same loan.

A few months ago, when rates were consistently lower than 6 percent, a mortgage company president told me that more than half of all mortgages were undergoing refinancing.

Though that seemed like an amazing number, the thought that hit me was, “What the heck are the rest of them waiting for?”

Rates are edging up, but they still remain under 6.5 percent this week. Sidestepping the market to wait and see what will happen with interest rates next season could be to your disadvantage.

As positive economic readings increase, more than likely, so will home mortgage interest rates.

Real estate investing is more about financing than any other factor. Besides, if you get in now and rates drop, you can always refinance. If rates jump up, you can thank me later.

M. Anthony Carr has written about real estate for more than 15 years. Contact him by e-mail ([email protected]).

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