But now, reversing a years-long trend, interest rates are back on the up-tick. Area brokers and Realtors are finding rates in flux between 5.75 and 6.5 percent for a 30-year fixed rate. As Greenspan turns his attention primarily to fending off inflation, many economists and real estate observers predict further rate increases.
How will all this affect home-owners, potential buyers and sellers, and those looking to refinance? Will housing prices fall? Will the seemingly forever-bullish real estate bubble finally burst?
Ever since the NASDAQ meltdown, some folks have been waiting for the next big bad equity story. Because most equity is found in people's homes, that's where pundits have been focusing. They face disappointment, however, as they watch and wait for the "house-price bubble" to burst. Most local Realtors project that just won't happen.
However, Realtors do advise acting quickly -- assuming, of course, that your financial house is in order -- before the rates jump any higher. And most Realtors and mortgage brokers will remind you that even if interest rates reach seven or eight percent, that's still a far cry from the upper-teen levels found throughout the 1980s.
There has not been a single year since World War II in which house prices across the United States have declined. Local markets, yes -- just look at New Orleans in the late 1980s -- but the whole United States, no. Homeowners know this intuitively and view housing as a solid, if conservative, investment. After all, you can't live in your stock portfolio.
It stands to reason: You have to live somewhere. There are more and more of us living in the United States, so we will need more and more places to live. The number of us is growing faster than the number of houses. Thus, no bubble!
Several strategies can offset the effects of rising interest rates and keep the housing markets strong. People can use adjustable-rate mortgages that typically have lower interest rates than fixed-rate mortgages and therefore offer lower monthly payments. Another mortgage product that assists in overcoming the affordability problem is the interest-only mortgage. Also, the family can adjust the kind or size of house it is buying or the amount of its down payment.
If interest rates were to rise above eight percent, experts say that in the near term, there would definitely be at least a temporary price appreciation and accompanying slowdown in home sales. An economist wouldn't necessarily call it a price bubble, but rather an affordability problem.
"Eight percent is the benchmark for interest rates," says Jason King, a local mortgage specialist with Coastal Mortgage Corporation. "Above and below that eight percent level, that's the difference in affordability versus non-affordability."
King predicts that interest rates will slowly inch upward until hitting 6.5 percent, where they will remain for a while. But, he says, buyers and sellers addicted to a market moved by record-low interest rates are troubled by even the recent slight increases. "We're staying relatively steady," King says. "But people are nervous now. The coverage that those record-low rates were getting -- companies were hyping them so much -- that people began to think of 5.25 as standard. It's not. Rates are cyclical."
King points out that increased interest rates are a typical sign of a healthy economy. "The silver lining about these rates is that they move in tandem with the overall economy," King says.
The rash of unemployment that came with the latest economic downturn necessitated the low rates. During that time, real estate transactions took place in huge volumes. But now that the economy is growing again, inflation has become the primary problem to combat.
"The refinance boom of the last two years has made a significant impact on the industry," King says. "A lot of people took advantage of those rates, and they won't be refinancing anytime soon."
King predicts that his industry --which has grown in leaps and bounds due to the last few years' boom, resulting in a surge in competition -- will now improve its offerings and diversify its lending plans. King also says that, traditionally, interest rates have waited to increase until after major elections, so prepare for another jump this November.
King sees two factors dictating the current market: prices that have hit their ceiling, and a lack of refinancing. "People still want to utilize their equity," King says. "It could be a second mortgage, but right now what's popular is the home equity line of credit. You'll see a lot of those in the next few months, instead of a simple refinance."
But, following the view that interest rates are cyclical, King expects that after the market adjusts to the new rates, it will be back to business as usual. "Prices are reaching their peak, and that's slowed down the market a lot," King says. "But I don't anticipate it staying that way."
Gayle Dudley began working with a large, nationwide real estate company in 1997. This past fall, she went into business for herself, establishing Gayle Dudley Realty, LLC in September. And while she's seen the changes wrought by the rate increases, she says the market stays strong.
"What I'm seeing are rates that are moving up toward 6.5 percent," says Dudley, who keeps her office in eastern New Orleans but handles homes on the West Bank, in Gentilly and across the metro area. "But when you compare that to levels of 14, 18 percent like in the 1980s, they're pretty low."
She says she's finding a well-informed pool of potential homebuyers who are fully aware of the rate increases before they call her office to initiate the home-purchasing process. "The new rates don't seem to be of too much concern -- yet," she says.
Dudley believes that until rates hit seven percent, the local market won't experience a decline. However, with experts calling for continued increases, she advises her clients to act now if possible. "I tell my clients that if they're serious and they're ready and have the money, go ahead and move on a house," she says. "I tell them, Don't wait for the interest to jump again.' If you're going to make a move, do it now."
First-time homebuyers, typically young couples or single professionals, often let the slightest market moves scare them off, Dudley says. Aging baby boomers, looking to enjoy retirement with the kids moved out of the home, are looking to change houses. This group, according to Dudley, is opting more for the 15-year fixed rate. "They don't want the headache of a 30-year note," she says.
Dudley also recommends that buyers shop around for their loan as much as possible, though she typically refers her clients to a trusted mortgage broker with whom she has experience. In addition, despite the rate increases, Dudley says the basic factor of real estate -- people wanting to own their own home -- is still the driving force.
"It's still a really strong market all over the city right now," Dudley says. "The areas that are hot, there's a lot of demand, and those places are seeing prices rise. Like Gentilly. Like areas that are convenient to the CBD. If people are able to, they're going to pay for the house they want."
RE/MAX New Orleans Properties Realtor Colette Meister shares Dudley's enthusiasm, particularly in regard to condo units and historic neighborhoods. "Condos are hot right now, the reason being people can move out of a rental and into a condo because they're affordable," Meister says. Meister should know: last fall, she sold all eight units of a new construction condo building in the 1100 block of Orange Street in the Warehouse District. The units -- priced between $118,000 and $189,000 -- all moved within three weeks. "But you also have new, large, luxury condo units, especially along the Lakefront, that are also doing very well," she points out.
"Warehouses are trendy right now; you're seeing them all over the area," Meister says. "They're the best of old and new, with historic properties, with high ceilings and wooden floors combining with modern things like granite countertops and Jacuzzi tubs. It's not your typical boxy, square, low-ceiling space that's typically considered a condo."
Meister also says interest in the historic areas of town is helping the local market. Noting that Uptown's prices are holding steady after years of boom and the French Quarter -- already not affordable to most buyers at $300 per square foot -- is not in a growth period, she says the momentum has moved to other areas. "The biggest change recently has been in the Bywater and Marigny; they're seeing homes double in value," says Meister, a Faubourg St. John resident. "Treme is hot, and so is the Irish Channel. "Prices are still going up," she adds, "but we're still in the process of catching up with the rest of the nation in terms of home values."