October 5, 2000

New NAR economist sees lower rates ahead

The economists who have worked for the National Association of Realtors have dispatched curious and interesting explanations for the signals sent by the Federal Reserve.

James F. Smith, the controversial former chief economist for the NAR who resigned in March to pursue other opportunities, often referred to Fed-influenced, home-loan rate ceilings as "the line of death." John Tuccillo, Smith's predecessor, liked to couch his predictions with "Fed watching has really become an arcane act." However, he was fond of saying "just when the party was getting started, Mr. Greenspan took the punch bowl away," indicating a jolting stop to a potential economic runaway.

Alan Greenspan, chairman of the Federal Reserve, definitely raised rates the past 15 months until his angle of supply and demand was properly aligned. That sparked the following line from "the new guy" -- David Lereah, recently appointed as the new NAR chief economist and senior vice president: "Every time Chairman Greenspan walks into a room and smells flowers, he looks for a coffin."

While Lereah (pronounced La-RAY) was not the original author of that Wall Street description, used in his first commentary for a Realtor publication, he was the first to say home-loan rates would not be moving up soon.

"It appears clear that the Federal Reserve will be sitting on its hands for the remainder of the year," Lereah said by telephone from Washington, D.C. "Thirty-year, fixed-rate loan rates have been coming down -- I think the last quote I had on a national average from Freddie Mac was 7.94 percent. I think that will drop closer to 7.75 percent by the end of the year.

According to Bank Rate Monitor, 30-year, fixed-rate money hit its high-water mark this year during the third week of May. That's when the national average rose to 8.38 percent, with a loan origination fee of 1.5 percent of the loan amount. Many markets were higher, but things started to trickle down hill from there.

"You have to remember that housing is the most rate-sensitive industry in our economy,'' Lereah said. "It interest rates go up, there are definitely going to be fewer buyers in the marketplace. "I estimate that a full percentage point affects approximately 250,000 new buyers. So, if rates were 8.75 percent and will be 7.75 percent later this year, that means 250,000 additional buyers will be able to consider a home.''

Unlike his predecessors, Lereah is reluctant to predict how housing and interest rates would fare in the first quarter of 2001.

"It's a tough call because the election is now over, and it's difficult to say what action the Fed will take in light of the recent oil prices,'' Lereah said.

Smith, who officially served as the NAR's prime prognosticator of interest rates on home mortgages for one year, was colorful and eager to predict what was down the road. He had incorrectly predicated that 30-year, fixed-rate loans would dip to 6.5 percent between Thanksgiving and Christmas last year.

He also predicated that 8 percent would be the "line of death" for home-loan rates this year, yet that plateau has been reached and surpassed through much of the first quarter.

For the past several years, Smith has been predicting a recession for 9 a.m., May 16, 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. By Christmas, we should see 30-year, fixed-rate mortgages in the 5 percent range because by that time the government will have taken drastic steps to stimulate the economy."

After the economic and emotional 2002, Smith said we will see four years that will make "consumers and Realtors very happy." The goal is to return to a period similar to the one we experienced from 1953-1965 when productivity was relatively high and inflation was never considered a major factor.

"I still think there is a possibility that your children, and my grandchildren, will have a shot at a 3-4 percent home loan," Smith said.

Now, remember... Smith left the chief economist position in March.

Previous columns:

• Dot-coms offer help to renters, 09-28-2000
• Helping the kids buy that 1st house, 09-21-2000
• Dorm option: Do you really want to play landlord?, 09-14-2000
• Location, location, schools, 09-07-2000
• Beware the predatory lenders, 08-31-2000
• Fix-up, remodel or move, 08-24-2000
• Limiting renters in condos, 08-17-2000
• New mantra: location, location and wired, 08-10-2000