January 06, 2006

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Publication Date: Friday, January 06, 2006

Housing market strong in 2006 despite rising interest rates

Despite rising interest rates and a slowdown in the local housing market over recent months, mortgage brokers and real estate experts still expect home sales in Pleasanton to continue at a strong, but more moderate pace in 2006 and beyond.

The Federal Reserve lifted a key U.S. interest rate for a 13th consecutive time last month. Analysts now believe that although the feds may hike the rate another quarter-point at their meeting Jan. 31, that could be the end for now of their credit tightening campaign. With the latest increase, the benchmark federal funds rate stands at 4.25 percent, the highest level since 2001.

Even so, David Walden, a Certified Mortgage Planning Specialist with Diversified Capital Funding of Pleasanton who daily tracks the financial media and Federal Reserve actions, said the interest rates are far below the peak rates in the early 1980s when the prime rate was 20.5 percent and mortgage rates hovered around 18 percent.

His research (see chart at right) shows that rates have averaged about 7 percent for more than 200 years. Conventional loans for residential mortgages now stand at between 5.5-6.25 percent, with short-term equity loans just now climbing into the 7.25 percent bracket.

"The Fed Funds Rate affects both home equity lines of credit (HELOC) and adjustable rate mortgages (ARMs), so it is very important to follow," Walden said. "Yet it is interesting to note that the Fed Funds Rate does not carry much weight when it comes to fixed mortgage rates, which are much more concerned with long-term inflation. Knowing that the Fed Funds Rate will move higher tells us that HELOC loans, as well as ARM loans will continue to move higher in 2006. Hybrid ARMs, now available at (3, 5 and 7-year fixed rates), currently are safe. But as time goes on, they, too, will become worrisome to some conservative folks."

Walden believes HELOC rates will climb to an average of 7.75 percent as the Fed grinds rates higher, so it might be a good time for those loans to be converted into fixed rate mortgages allowing for another refinance market. Those who got into homes with 100 percent financing loans during the creative loan options available in 2004 and last year because they could not otherwise qualify will be the ones who feel the pinch most as rates increase.

Walden points out that the tax deductibility of the residential interest is the only saving grace. But in the typically high-end mortgage loan market in Pleasanton, if the Treasury lowers the ceiling of interest deductibility, there could be real trouble.

And speaking of ARM loans, the Federal Reserve's long-time Chairman Alan Greenspan recently expressed a concern about the possible overuse of "exotic" ARM products, such as interest-only loans or option ARMs. These types of loans are an effective tool for folks who have cash flow fluctuations allowing them to have the option of a lower payment one month and then making up the difference in succeeding months.

While they may be a poor idea for those who used the lower qualifying rates to get into the home on a tight budget, those types of loans are also tools to keep the tax deductible interest at its peak with the chance to invest the savings to get a better return on the money.

"There are a lot of borrowers in the market who have saved quite a bit of money by using the short term ARMS for their mortgage," Walden said. "In many cases enough was saved, even with the impending increases, to still be ahead when the market finally turns back again (as it always does) into a downward interest rate market."

Walden said Realtors and mortgage brokers are working on the premise that there will be a continuing strong market going into 2006.

"Although the national media keeps talking about a housing bubble and a possible downturn in housing prices and sales, I don't see that happening here," he explained. "The city coffers are strong, even with outstanding bond commitments on the new $38-million golf course. New homes are still being built and even the commercial office market is seeing some new starts."

"We're not going to see the 18.1 percent increase in housing prices that we had in 2004, but prices will continue to rise this year and into 2007 and 2008, probably in the range of 6 to 10 percent."

Realtor Gina Piper of Prudential California Realty confirmed that the housing prices have stabilized. The days of the frenzied local real estate market are over, at least for now, where sellers considered multiple offers and accepted the highest bid.

"Buyers are now able to get into the home of their choice without having to compete against multiple offers and pay more than the asking price," she added. "So it's become a market that's really good for buyers, especially those who waited, and it's also a good market for sellers who simply may have to wait a bit longer to sell their homes."

Sellers afraid that rising interest rates will squelch the market or buyers fearful that the record-high interest rates of the early 1980s might return shouldn't be, Walden said.

"On average, for a mortgage of, say, $300,000, if you have a 1 percent increase in interest rates, it's only going to cost $6.42 more a day, a little more than you probably pay every day at Starbucks," Walden said. "Do you really think people are going to stop buying homes in Pleasanton over a mortgage rate increase that's the price of a Starbucks coffee? I don't think so."

Walden, like other mortgage brokers, is not a Realtor and does not sell homes. Instead, he's the first stop for potential buyers before they work with a local Realtor in finding a home here. Walden's research will show how much of a mortgage they could handle, and then he sends that information to a lending institution which will decide if it will advance the money. If it does, the Realtor will have a pre-approval letter from the bank to show the seller, and the transaction can move forward quickly.

Even though appreciation has slowed, Piper said home values are still going up. She sees no threat of price drops such as Pleasanton homeowners saw in the economic downturn of the early 1990s.

"Pleasanton is just too great a place to live with good schools and a strong economy," Walden said. "The demand for homes here is still strong."




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