Housing Market Expected to Finally Cool

By DIANE WEDNER

May 5, 2000 12 AM PT

TIMES STAFF WRITER

Mortgage rates ticked upward last week to heights that historically have put the brakes on the housing market. Real estate experts predict a dip in home sales ahead, but admit that bullish consumers probably won’t be scared off for long.

Nationally, interest rates for 30-year, fixed-rate mortgages rose slightly to 8.28% Thursday, from 8.13% last week, according to Freddie Mac, the nation’s second-largest buyer of U.S. mortgages.

In late 1998, a mortgage could be obtained at 6.7%.

In Southern California, 30-year mortgage rates last week climbed 3% to 8.39%, from 8.13% a week ago, according to Earl Peattie of Mortgage News Co.

“These numbers show a definite change in direction,” Peattie said. “We’re now solidly in the 8% range, which makes it harder to qualify for loans.”

But even though rates have been steadily climbing since March 1999, consumers have shown little hesitation so far to jump into the housing market, real estate experts say. California posted record sales last month of about 562,000 homes, up 6.8% from a year ago.

Although a climb in interest rates has a psychological effect on home buyers, economists say, the recent stock market correction will have a greater effect on the housing market.

High-end buyers, who have been relying on stock market windfalls more than other consumers have, are expected to think twice about buying expensive homes, affecting sales at the top of the market.

Middle-income consumers, who rely less on stock market funds, will feel the pinch less, experts say, but will still have to adjust their sights. Those who could afford a $285,000 house last year, might have to settle for one costing $248,000, according to John Burns, a housing-market analyst with Meyers Group.

The expected slowdown in home sales probably will not be long-lived, in any case. As consumers get used to the higher interest rates, economists say, they will start spending again. “People complained about gas prices recently, but still filled their tanks,” said Rajeev Shawan, Director of Economic Forecasting at UCLA’s Anderson School. “This won’t hit their pocketbooks in a big way.”

At least, not until the Fed raises rates again, which may happen this month, said Michael Carney, real estate professor at Cal Poly Pomona.

“Until now, interest rates have had no effect on home sales, as far as I’m concerned,” Carney said. “But there will be a slowdown if the rates go up a half-point, which I think they will.”

Economist Brian Carey at the Mortgage Bankers Assn. of America predicted that interest rates will top out at 8.9% for a 30-year mortgage by the end of the year, resulting in a 9% decline in existing-home sales for the year.

Some real estate experts say that the real surprise is that home sales haven’t declined already. G.U. Krueger, a California Assn. of Realtors economist, said home sales historically have gone down when interest rates go up.

CAR has predicted an 8% decline in sales this year from 1999, but Krueger was quick to add that that number still reflects a very brisk market.

Real estate agents agree. They have complained for months about a lack of inventory and continuing drop in affordable housing, which they say will have the greatest dampening effect on sales.

March CAR figures show that housing affordability in California dropped to 31%, down 8% from a year ago. The housing affordability index measures the percentage of households able to afford the median home price.

In Southern California, San Diego County was ranked the least affordable, at 25%, followed by Orange County, at 28%. In Los Angeles County, the index dropped to 37% from 42% a year ago, a 12% decline.

Still, agents remain optimistic.

“Many of my clients pulled their money out of the stock market before it fell last month,” said Ramsey Schilling agent Marion O’Mara, whose office covers the east San Fernando Valley. “They knew this was coming and they took action. Sales are great.”

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Rates Up, Affordability Down

The 30-year, fixed-rate mortgage reached 8.28% this week, up from last week’s average of 8.13%. In addition, housing affordability in California fell to 31% in March, the latest month available. Los Angeles County fared a little better at 37%, but still far below the national affordability index of 53%. Mortgage applicants may be facing more difficult choices as rates rise and affordability declines:

Average 30-year, fixed-rate mortgage

Figures from the last week each month and latest

Thursday: 8.28%

California affordability index

Percentage of households that can afford a median-priced single-family home

March: 31%

Affordability by area

The High Desert was the most affordable area.

High Desert (Lancaster area): 72%

Riverside/San Bernardino: 48

Los Angeles: 37

Palm Springs area: 37