THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, December 31, 1994 TAG: 9412290299
SECTION: REAL ESTATE WEEKLY PAGE: 04 EDITION: FINAL
SOURCE: BY MARY ELLEN MILES, SPECIAL TO REAL ESTATE WEEKLY
LENGTH: Medium: 83 lines
With 1995 upon us, many who work in real estate have been speculating how the new year will treat the property market. The opinions of three in the field are below.
Eric D. Smith, a broker with Advantage Mortgage Co., in Virginia Beach, predicts that business will be slow during January. ``All indications are that the trend of rising interest rates will continue through the first quarter of 1995,'' he says, ``with rates peaking at approximately 10.5 percent.''
After that, he expects the rates to moderate to just under 10 percent in the second quarter.
Smith also believes the Federal Reserve Bank will raise short term rates at least 50 basis points at the end of February, causing added flattening or even an inversion of the long and short bond yield.
``What this means to the consumer is that we currently see adjustable rate mortgages (ARMs) with fully indexed rates of 9.5 percent, exceeding 30 year fixed rates of 9.25%, clearly eliminating the benefit of a T-bill, CD or Libor ARM,'' he says.
He says the only exception would be an ARM tied to the very low and slow moving 11th District Cost of Funds Index (COFI), a financing vehicle his firm is pushing. Last week, a full indexed COFI ARM was at 6.687 percent.
Exactly what the Fed will do and how the public will react is always a guess. It is often many months after the action of the Fed before we can judge the effects on the market.
There are also the psychological factors of the public to be considered. For instance, if people see 11 percent interest rates, they may feel ``sticker shock,'' says Smith; people may feel better when rates moderate at 10 percent or less.
Smith believes many people may choose to renovate their houses in 1995, rather than buy or build new ones.
Mortgage brokers can still thrive in this type of environment, says Smith. There are hundreds of mortgage programs available to suit the needs of each borrower.
Darlene M. Lamb, president of the Tidewater Association of Realtors, and vice president and managing broker for Chesapeake's office of Prudential Decker Realty, agrees that today mortgage companies are getting very creative in the loans they offer.
She believes that this creativity, along with the expanding economy, will foster a good year for house buying in spite of the rising rates.
``We were a little spoiled in 1994,'' says Lamb. ``We enjoyed extremely low interest rates the Summer of 1993 and winter of 1994.''
Lamb reminds us that the interest rates reached 17.5 percent in the 1980s. Keeping that in mind, current rates of approximately 9 percent are not bad.
``The Federal Reserve is telling us there will be an increase in interest rates by February,'' Lamb says. In the short term, rates won't drastically be higher as people feared, but will stay approximately the same, she says.
However, adjustable rate mortgages will be a little higher.
The year 1994 brought an approximately 3.5 percent growth in the economy, with very little inflation. Next year will bring 2.5 to 3 percent economic growth, Lamb predicts, which she calls a ``happy medium.''
From a builder's point of view, Michael Newsome, president of Michael Lee Co. in Virginia Beach, 1994 was ``an aberration;'' therefore we must expect change in 1995.
He says ``we may see another increase (intrest rates) which will have the effect of reducing the consumer's sense of urgency.''
Newsome has been told by contractors that 1995 will bring price increases to builders, which in turn will bring price increases to the public. Traditionally, the real estate market has moved in cycles of price increases and decreases; however, there's been a recent trend for increases in lumber prices which has not ceased.
Newsome explains that logging is still being restricted and ``there's been no effort by the government to restock the West Coast forests,'' a forewarning to the public that lumber prices probably will continue to soar.
Being aware of the market's cycles and the wait-and-see process of the Federal Reserve's actions, Newsome still expects 1995 to be ``reasonably normal.'' ILLUSTRATION: Staff photo by DAVID B. HOLLINGSWORTH
Darlene Lamb, president of the local Realtors association, says it
will be a good year despite the interest rates. ``We were a little
spoiled in 1994,'' she says.
by CNB