Mortgage lending takes first hit; brokers still confident Article by Jessica Swesey Real estate economists remained bullish on housing this week as the U.S. war against Iraq continued and appeared likely to go on for longer than government officials initially suggested. Brokers and lenders are optimistic the worse-case scenario will not materialize. Long-term interest rates posted their first significant weekly gain in many months immediately after combat began nearly two weeks ago, according to the Mortgage Bankers Association of America's weekly survey. That raised the question of whether rising rates would weaken the booming housing market. "We've already seen in the short-term that war has had a negative impact on the mortgage market," said Ted Grose, president of the California Association of Mortgage Brokers. Grose, a mortgage broker with 1st Mortgage Advisors in Los Angeles, believes home sales won't be affected until interest rates cross the 7 percent mark and even then sales figures will have nowhere to go but up in markets like California's where the demand exceeds the supply of housing. He expects interest rates to hit the high 6 percent or low 7 percent range by the third quarter of this year. When interest rates arrive at 6.5 percent, he said, the refinance mania most likely will disappear. Grose also said the war has reconfirmed the inverse relationship between the stock market and the bond market. "In the medium-term, money moves from the bond market to the equities market, and the result will be to raise long-term interest rates," he said. Leslie Appleton-Young, chief economist of the California Association of Realtors, doesn't expect the war to put a screeching halt to home sales. She said so far it's been business as usual. The association predicted a slight drop in statewide sales this year even before the war started because last year's sales were unusually high. "Housing has been almost counter-cyclical. The market has been unbelievably strong," she said. Appleton-Young said the freeze in home sales after the Sept. 11, 2001, terrorist attacks isn't a good comparison for today's situation because positive housing market fundamentals supply, demand and attractive interest rates are still in place. She pointed out that everything paused after 9/11, not just home sales; people stopped traveling, buying cars and shopping. That hasn't been the case this time. Raphael Bostic, director of the Casden Real Estate Economics Forecast with the USC Lusk Center for Real Estate, expects interest rates to move up gradually in the long term, but without sudden drastic jumps. "When the war began, everyone believed it would be a short war. There was some belief that markets would normalize and the economy would strengthen, causing the Fed to move and long-term interest rates to rise," said Bostic. He added it's too early to calculate the exact long-term impact of the war on interest rates and housing because a post-war increase in interest rates should be coupled with an improved performance in the general economy. That could be a mixed blessing for housing. He thinks housing would be the last sector to fail even if the war dragged on. "The longer the war goes, the more likely we'll be to fall back to where we were before combat started. And even in that environment, housing was doing very well," he said. Real estate brokers haven't reported slowing home sales activity as a direct result of the war, but that may be because a lot of transactions were in the pipeline to close or buyers were rushing to take last-minute advantage of record-low interest rates in fear of rates rising further. Lennox Scott, president of John L. Scott Real Estate, a regional brokerage in the Northwest, said a hike in interest rates usually causes a slight surge in sales because buyers realize they have to act quickly. "This continues to be an opportune time for home purchase and refinancing," said Scott. He said there's been no slowdown in reported sales in the Northwest since the war began. Dorcas Helfant, broker owner of Coldwell Banker Helfant in Virginia Beach, Va., also said the increase in interest rates hasn't yet proven to be a negative factor in sales activity. She doesn't expect a slowdown in transactions due to the war. "We have not noticed a real softening yet, because our inventories (of for-sale homes) are still fairly lean," Helfant said. Expert predictions of the war's impact on the housing market haven't changed since the first bomb fell on Baghdad: If the battle plays out quickly, interest rates could rise but not enough to seriously damage home sales. If the battle turns out to be long and costly, the expenditures would trigger more deficit spending by the federal government and that would lead to higher interest rates for individual, corporate and government debt. Higher interest rates could create far more uncertainty about the direction of consumer confidence and home sales.
April 1, 2003