by Jessica Swesey
Inman News
The housing market won’t crash as a result of rising interest rates—at least not anytime before the next Presidential election in November 2004, according to Christopher Cagan, director of analytical research for First American Real Estate Solutions.
Economists say the 1 percent increase in the average interest rate on a 30-year fixed-rate mortgage since June will slow new and existing home sales and stunt the rate of home price growth, but they don’t predict a market collapse. Low interest rates helped fuel the three-year housing boom that has been a major pillar of the economy in recessionary and post-recessionary times.
Cagan believes the real estate market will remain strong through 2004 because the Federal Reserve and its chairman, Alan Greenspan, want to stimulate the economy and President Bush wants to win a second presidential election. Bush risks losing in 2004 if the economy falls back into recession despite his declared victory in Iraq because voters may not look back that far in the President’s term.
“It’s known that the American public doesn’t have a long memory,” Cagan said.
He pointed out that Bush and the Fed will do whatever is necessary to avoid an economic recession like the one that caused George Bush Sr. to lose the 1992 election even if anti-recession actions spur a rise in inflation. But Cagan believes the housing market would perform well even if the Fed’s actions spurred higher inflation.
“Real estate is the greatest hedge against inflation,” he said. That’s because buying a home for the long term would prove to be a good investment as inflation drives up its value.
The Fed has cut the overnight borrowing rate for banks 13 times since January 2001 to try to stimulate the economy. Greenspan hinted earlier this year the central bank also might consider unconventional stimulation methods such as buying up Treasury bonds, but he backed off the possibility in a speech before Congress last month.
The Fed lowers and raises the short-term interest rate between banks to fight inflation and try to jumpstart an ailing economy. The short-term funds rate isn’t directly tied to long-term mortgage rates but can indirectly cause long-term rates to move up or down.
The financial policies of Bush and the Fed resemble those of liberal Democrats more than they do conservative Republicans, in Cagan’s opinion. But again, he makes a connection between those policies and Bush’s political agenda of avoiding recession by any means necessary.
“A conservative can act like a liberal if that is what it takes to get re-elected,” he said.
Greenspan’s group continually stands by its accommodative stance to economic policy (i.e., low short-term interest rates) and has said it sees no possibility that it will run out of monetary ammunition should the economy continue to sag. That means the Fed is ready to cut the short-term federal funds rate again, buy Treasury bonds or possibly resort to alternative methods to help stimulate growth, in Cagan’s view.
Economists agree that the chances are slim that the Fed will substantially raise the short-term interest rate over the next year. National Association of Realtors Senior Economist Lawrence Yun expects the central bank to hold steady on the federal funds rate through the first half of next year, then slowly change its monetary stance in the summer of 2004.
“An increase (in the funds rate) by the Fed even at that time would be (in) small steps,” he said.
Yun expects the average rate on the 30-year fixed-rate mortgage to rise steadily over the next year, but he doesn’t forecast it to reach 7 percent any time in 2004.
David Stiff, manager of econometric research at Fiserv CSW, noted that the Fed has said it would wait a few quarters after it sees inflation rise before it would raise the federal funds rate. With that in mind, he said, it’s unlikely Greenspan’s group will begin raising the short-term interest rate any time soon.