Real Estate NewsNAR Economists Divide, But Concede 7 Percent Rates Possible
The NAR, which has been forecasting interest rates as low as 6.0 percent by the end of 1999, has begun acknowledging the federal reserve"s upward push and now concedes it is possible that rates will hover above 7 percent until the end of the year. NAR economists, however, are not unanimous in that view.
Writing in the August issue of Real Estate Outlook, Forrest Pafenberg, the NAR"s director of Real Estate Finance Research, said 7 was percent was likely.
"Thirty-year fixed-rate mortgages are expected to hover around 7.15 percent for the remainder of 1999, while one-year adjustible-rate mortgages are expected to rise slowly to 6.0 percent by Fall," said Pafenberg.
NAR chief economist James Smith, however, believes 6 percent rates remain possible.
"The Fed will increase short term rates today (Tuesday), and that will trigger a flight of capital to the United States," he said. "I think we"ll see 6.5 or 6 percent by the end of the year, maybe even lower."
Two months ago Smith, also writing in Outlook, argued that Wall Street concerns of higher interest rates were unwarranted, noting that consumer price inflation was projected to average only 1.4 percent for 1999, down from 1.5 percent last year. "Despite fears on Wall Street, inflation is not a problem in this economy," Smith insisted.
Pafenberg agrees the current round of rate hikes are not justified. "Clearly the fed has raised rates. What"s different is that usually it is core inflation that drives mortgage rates. But there is no surge now in core inflation," Pafenberg said.
"I think a couple of things have change the Fed"s thinking. They are raising rates now because they won"t be able to next year" because of the elections. "The Fed is concerned the economy continues to go full bore with no real signs of slackening. They have a concern that wage pressure will get out of control -- but that"s a "potential" fear, not a "realized" fear."
He also said over the past several months the U.S. dollars had generally weakened abroad, though strengthening lately, which has curtailed America"s ability to "export inflation."
Ironically, even though interest rates remain a hot topic among real estate professionals, their role in the actual number of home sales in the last few years has diminished.
In the old days -- about 5 years ago -- a good rule of thumb was that every percentage point increase would move about 750,000 families out of range of homeownership. Not anymore.
According to Pafenberg, hot competition by lenders and their ability to stylize and customize loan packages today makes it very difficult to tell who -- if anybody -- is actually eliminated by modest rate movements.
"Back then it was a sort of back-of-the-envelop calculation. But you could do that because it was an either/or choice: Either a 30-year fixed, or an ARM. But now consumers are able to negotiate rates and points. Down payments are negotiable. Flexibility in the marketplace has changed the whole attitude of loan qualification," he said.
Smith is undaunted by the current high rates and predicts lower ones will arrive with the next recession -- which he predicts will begin at 9:15 a.m. on May 16, 2002. "That"s when the Board of Governors of the Federal Reserve System will release "Industrial Production" data for April," Smith said. The good news is, however, is that interest rates on 30-year fixed-rate mortgages are forecast to fall to 5.0 percent by December 2002, igniting a boom in refinancing and spur a renewed activity in home sales.
For more interest rate news, check out the Realty Times Interest Rate Watch