November 27, 1997

Home loan rates will remain flat

By TOM KELLY
The Real Estate Advisor

Remember John Tuccillo? He's the consulting economist for the National Association of Realtors who has stated since 1994 that home loan rates would remain relatively flat until at least the year 2000.

I caught up with him at the NAR convention in New Orleans recently and reminded him of our 1994 meeting and how accurate his predictions have been.

"A lot of people definitely thought I was losing it," Tuccillo said. "It would be nice, though, to be that close on everything."

Tuccillo, one of the most respected and recognized interest-rate prognosticators in the country, told the 18,000 convention attendees that the only pressure on mortgage rates for 1998 would be downward. And that scenario could easily extend into 1999.

"Thirty-year mortgages have been in the 7.25 to 7.5 (percent) range and I see those numbers dropping to 7 to 7.5," Tuccillo said. "Not only that, but national housing starts no longer will be a measure of demand. Builders will build homes if they can find the land to build them. If they can, they will, period."

Tuccillo predicted a rosy outlook for existing homes, too. Approximately 4.15 million homes will change owners this year, up from 1996's record of 4.08 million. And consistency is on the horizon with 3.5 million to 4 million home sales expected annually in the next five to 10 years.

Tuccillo, former chief economist with the National Council of Savings Institutions, concurs that the economic policy of Federal Reserve Board Chairman Alan Greenspan, and a national emphasis on increasing the number of first-time home buyers, are expected to push the residential market.

Although Tuccillo is relatively confident that the nation's economy will remain strong, "there are a couple of wildcards out there to consider," he said. "We don't have to get excited about them yet, but there's a 20 percent possibility that they could come in to play.

"The first is if consumer debt becomes too high to sustain, and the second is Southeast Asia's economic markets," Tuccillo said. "The Asia situation is not unlike Mexico a couple of years ago. Things are looking better there now but this is truly a global economy we are in. Psychologically, it's important that there's some semblance of recovery."

Consumer debt cuts deeply into home equity. If the credit cards come out too often, sometimes the only savior is pulling money out of the house to pay off those credit cards.

"The overall good news in real estate has a lot to do with a return to the values of capitalism and entrepreneurship," said Tuccillo. "The house is becoming an equal part of a consumer's portfolio along with stocks and bonds. That total picture can be eroded by consumer debt."

The baby boomers will clearly be the ones gaining -- and perhaps borrowing back -- home equity. Consumers aged 45 to 55 years old will constitute the largest segment of the population moving up to larger, more expensive homes.

And, with the recent changes in capital gains tax law, the move-down market will not be just folks age 55 and over. Younger homeowners will be selling and moving down, perhaps buying two smaller homes in different locales.

While younger move-downs have trickled in, the activity cannot be labeled a trend.

"I think the only real thing that has surfaced regarding capital gains to this point is that it has definitely hurt the luxury segment of the market," Tuccillo said. "The tax-shelter benefits of owning huge homes clearly have been reduced."

The new law provides $500,000 of tax free gain to couples filing jointly and $250,000 tax free to single persons.

The largest segment of new first-home buyers will be among the 800,000 to 1 million immigrants moving into the United States annually. While the federal government has set a new goal of 75 percent home ownership in the United States, two factors will determine whether that's achievable. The immigrants' buying performance has yet to be proven, and a dwindling pool of first-time American-born buyers between the ages of 27 and 35 could also skew the future housing picture.

Thirty-year, fixed-rate loans in the Puget Sound area last week averaged about 7 1/4 percent with a loan fee of 1.75 percent of the loan amount. Fifteen-year loans were at about 6 7/8 percent with a loan fee of about 1.75 percent.

If you are a first-time, move-up or move-down buyer, it's difficult to take advantage of the low point in rates because you won't react to that mark until rates begin to rise. The last big valley was the third week of October 1993, when the national rate for 30-year fixed rate loans was 6 5/8 percent. There's a chance we may get there again, but even John Tuccillo doesn't know for sure.

Previous columns:

• Boeing, CB-Bain sign affinity marketing deal, 11-21-1997
• Home-equity: Should you bet the roof?, 11-07-1997
• Builder sweetens Costco dealer for agents, 10-31-1997
• Should you increase your title insurance coverage?, 10-24-1997
• As interest rates dip, refinancing options abound, 10-10-1997
• Feds clean up Fair Credit Reporting Act, 10-03-1997
• JLS being 'proactive' with Costco deal, 09-26-1997
• Home businesses are changing our homes, 09-19-1997