November 19, 1999

A look at the future of housing

By TOM KELLY
The Real Estate Advisor

ORLANDO -- If you had to postpone a trip to Grandma's for Thanksgiving because finances were simply too tight on the homefront, things may loosen up a bit before Santa comes barreling down the chimney.

There defi- nitely will be one last time to refinance your home loan in 1999, according to the chief economist for the National Association of Realtors, but the huge drop in rates is still three years away.

James F. Smith opened the NAR's recent annual convention in Orlando by saying 30-year, fixed-rate mortgages should take a dip between Thanksgiving and Christmas -- perhaps as low as 6.5 percent -- before ticking back up again after the first of the year.

"Interest rates next year will look a lot like they did this year," Smith said during a residential real estate outlook briefing. "You'll see high 7's for most of the year. Eight percent will be the line of death."

If there is a window remaining for first-time buyers to lock in some of the lowest rates of the year -- or for existing borrowers to refinance, it will be a Y2K-charged time before the end of 1999.

"There are a lot of worried people out there and it will translate into a dip in rates," Smith said. "Many of them are the same people who bought refrigerators and freezers at a record pace this year."

The economic situation has been rosier than most analysts predicted with more income, less inflation and more productivity netting more savings than expected for consumers. In a capsule, the government decided to take a different avenue to how it views this country's economy -- specifically worker efficiency. Since 1959, workers have done a better job than analysts previously thought.

"It was the most amazing present we could ask for," Smith said. "It basically said that all good things were better than we had thought and that all bad things were not as bad. We had less inflation, more income, more savings and more productivity than anyone thought possible."

In addition, another "feel good" economic condition arrived earlier this month when Congress approved a remodeling of 1930s banking laws that drastically restricted what bankers could sell. The new laws permit banks, securities firms and insurance companies to merge and peddle each other's products.

Proponents say the new law, which President Clinton signed last week, repeals the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act and allows financial institutions to compete on a more level playing field with some of their international counterparts, thereby giving consumers greater choices of services. Opponents say the law opens the door for even bigger conglomerates that will raise fees and violate privacy rights.

Privacy has become the hottest consumer issue, bolstered by the rising number of consumers who are transacting on the Internet. Congress has made more than a dozen attempts in the past 25 years to upgrade financial guidelines but many have been shot down because of the lack of privacy safeguards. Reportedly, the latest version was overwhelming accepted because of the growing number of consumers who are willing to provide information online given the safeguards already in place.

However, given all the positive news -- and it could not be much better -- the good times will not roll much longer, according to Smith. For the past several years, Smith has been predicting a recession for May, 2002. He maintains that long-term interest rates will bottom out at 5 percent for 30-year loans seven months later.

"There has not been a time since 1913 when a recession did not follow an inverted rate curve," Smith said. "That curve will first appear in August, 2001, with a real recession coming the following May.

Home sales should hit a fourth record year in 2000, topping out at 6,000,000, but the pace should slow down next year, according to Smith. Tight inventories, coupled with greater than expected first-time buyer demand and higher mortgage rates will curtail sales numbers.

If you find the home you want, don't want for interest rates to come down to roll the dice. If you get in the door now, your home appreciation will probably more than make up the difference.

Previous columns:

• Your guide to mortgage insurance, 11-05-1999
• Who needs HUD?, 10-29-1999
• A closer look at inspections, 10-22-1999
• HUD earns its criticism and praise, 10-15-1999
• NAR faces stock option scandal, 10-08-1999
• Taking on a partner in buying a house, 10-01-1999
• Do you really need a broker?, 09-24-1999
• Two new options for homebuyers, 09-17-1999