When the real estate pundits polished off their crystal balls at the end of 1993 and peered ahead, they saw stabilized mortgage interest rates, strengthened consumer confidence and healthy sales gains in Maryland's existing and new-homes markets.
A year later, it has become clear how less-than-perfect that vision may have been.
Mortgage interest rates, starting the year in the nearly record-low 7 percent range, shot up and kept climbing, ending up at 9.29 percent last week. A mortgage refinance boom tapered off after the first quarter but not before helping to deplete a stock of potential homebuyers.
Slow regional job growth and repeated increases in short-term interest rates by the Federal Reserve shook consumer confidence. Though home sales posted gains each month through June, sales began dropping off sharply each of the following months in the Baltimore region. For the first time in four years, home sales will probably decline. December's figures are expected this week.
The Sun -- with fingers crossed -- asked real estate experts to assess 1994 and look into their crystal balls toward 1995.
4 Anil Kshepakaran, loan officer, Signet Mortgage:
At the beginning of the year, you saw a fair amount of people still refinancing their homes. Then rates began to increase. It wasn't advantageous to refinance. There wasn't as much resale going on because a lot of people were increasing their loan amounts. People who were planning to move decided instead to go ahead and refinance their homes.
Because rates had started to climb, we didn't see a boom during the fall. A lot of Realtors were amazed and taken aback by it, thinking they'd have a slow summer like in the past, but the fall should be better. That's when rates kicked in, and people could not qualify for a mortgage. Rates really put a damper on the resale marketplace.
The marketplace has now stabilized, ratewise. We might see another increase in the first quarter, but there is going to be some stability in '95. We see people coming out of their shells and making that purchase. I think they'll still lean toward the new homes market because of builder incentives that allow builders to contribute money toward settlement costs.
A lot more mortgage products are being designed for this rate environment, with a lot of crossbreeds between ARMS [adjustable-rate mortgages] and fixed rate, offering more stability but a lower start rate. That in itself has helped people buy homes.
Michael A. Funk, assistant director, University of Baltimore's Regional Economic Studies Program:
It will be difficult for the first two quarters of '95 duplicating numbers we saw in the first two quarters of '94. The second half of the year might be the same as the second half of this year. There will be fewer sales overall in '95 than in '94. I'm not as optimistic as I used to be.
There are one or two reasons. The first, of course, is interest rates and anticipation over the interest rate hike at the first [Federal Reserve] meeting in mid-January. I also think part of it is a natural cyclical nature of home sales. The recession was followed by a big surge of buying when rates got low. People realized rates were up and would continue to go up. That's why we saw robust home sales in the early part of the year, and they tapered off significantly. Now, most people who were planning moves have made them. There is not quite the pent-up demand.
We've forecast an approximately 5 percent decline in housing starts, so that's a good indicator of residential housing sales -- flat to off by 5 percent.
It's pretty clear we're going to have higher interest rates. In the first two quarters of '95 we'll see an economic slowdown as a result of Fed policy, and once we see the economy slowing down, we won't see an interest rate increase in the latter part of '95.
I don't think it's going to destroy the industry. I think it will be a moderately down year for real estate but wouldn't say it will be a total washout.
Keith T. Gumbinger, HSH Associates, which tracks mortgage rates:
We do think interest rates will be somewhat higher earlier in the year. The 30-year rate will peak at 9.5 percent, or a little more or less, at the latest before April, but then we're likely to see soft fixed-interest rates as the economy slows down a little bit. We will see reasonably higher rates early on with the overall rate over 9 percent for the majority of the year.
The rise in interest rates has meant a couple hundred a month [on a monthly mortgage payment.] Some people are sitting on the sidelines. That will continue until incomes catch up, housing prices fall off or interest rates fall.
ARM rates have been rising over the last couple of months and the gap between the [fixed rate and adjustable rate] will narrow. Now 49 percent of all mortgages are ARMS or hybrids. The [percentage] will continue to rise and ARMs will pass the 50 percent share before peaking out at about 60 percent. Originations total will drop off. We'll see a lot of smaller mortgage bankers go out of business. We're going to see problems crop up in mortgage banking. They will have problems making enough loans to make a profit.
Wesley Foster, chairman, Long & Foster Real Estate Inc.:
I like to feel that after the government raises rates in January, sometime in the spring they might drift down. They may have done what they need to do to slow the economy. Maybe we'll have interest rate relief and that, with the pent-up demand, will bring a decent spring market. I don't see a rebound in the first quarter but see a better first quarter than the fourth quarter.
We had the best month we ever had in the history of the company in March [with rates in the 7 percent range] then we started [a decline], 10 percent off in April, 10 percent in August, then 15 percent in September and October and 18 percent in November.
Rates have a lot to do with it, and there is some job apprehension with the bulk of corporate and job downsizing. What will it take to strengthen? Lower interest rates and firming up of the job market.
Dwight Griffith, president of the Home Builders Association of Maryland and vice president and co-owner of Griffith-Brilhart Builders Inc.:
My gut feeling is next year will be a repeat of this year. With the increase in rates six or seven times, we really don't know what it's going to do next year. If [the Fed raises rates], it will greatly affect us. If it doesn't, we'll be OK.
I've heard optimism and pessimism. Is it going to be a record-setting year? No. Is it a bust year? No. We need interest rates to remain stable and consumer confidence.
Rates affect the entry market. They greatly affect the first-timer. A quarter- or half-point raise in interest rates can push them out of being able to settle on a mortgage. As you move into the midrange, it does not make as much of a difference.
Interest rates and job security -- more job security -- have put a halt on everything. Even though the job situation has improved, someone isn't going to spend six figures on a house because they just got hired at a job.
J. Nicholas D'Ambrosia, president of the Maryland Association of Realtors and vice president of Coldwell Banker Nyman Realty:
If interest rates do rise, it eliminates a number of people from the marketplace every time they do. We have a lot of inventory on the market, and prices haven't increased.
With the rise in interest rates and the overall attitude, people just don't have a real good feeling about the way things are going. We believe the market is going to be kind of flat and equal to this year. Adjustable-rate mortgages will become less popular and fixed-rate will take the forefront.
Anthony Alston, co-owner, Apex Realty in Baltimore:
There should be more availability of the CDA [Community Development Administration] program. The Fannie Mae Community Homebuyers program is becoming more competitive. And the banks are coming up with more programs that will compete with FHA and Fannie Mae programs. Private lenders are now becoming wise to making programs beneficial for purchasers, to attract them away from FHA loans. Competition is so intense that it's making it more beneficial for the purchasers.
I'm looking for the buyers to come back into the market in the first quarter. Anytime CDA issues funds, they have a great influx of low- to moderate-income buyers. With private lenders recognizing this, they'll be developing new programs to compete and drive buyers back into the market. That will have a pyramid effect. They'll buy homes from people who will buy step-up homes. I can see rates going up after income tax time, then leveling off.
David W. Berson, vice president and chief economist, Fannie Mae:
Mortgage rates are important for housing, but not as important ++ as overall economic growth. This year, 1994, was the second-best year we have ever had [nationally] and mortgage rates were up. Why? Because the economy was strong. Labor was strong. Income was strong and to a large extent offset the increase in rates.
The economy in Maryland is still very weak, and the labor market is quite weak, with growth in Maryland in the bottom five.
Last year, not a lot of jobs were created. Until the labor market in the state picks up, it will be difficult for the housing market.
Interest rates matter more in a weak economy. In Baltimore, with a weak regional economy, higher rates have a bigger impact. It will be at least '96 or '97 before the housing market is strong in the state.
Stanley F. Duobinis, director of forecasting, National Association Home Builders, projects the nation's single-family housing starts -- up in 1994 from 1993 -- will fall from 1.18 million units in 1994 to 1.09 units in 1995, while construction starts of single-family homes in Maryland are expected to fall from 27,200 last year to 24,600 this year:
Nationally, we'll see increasing weakness as we come into the new year. We had this buildup in interest rates and projection of slowing economy, and in the new year there will be some slowdown as interest rates increase. The only reason we haven't seen a steeper decline for the new market is that job growth has been much stronger in 1994.
Consumer confidence is rising and income is rising. In addition, people switched from fixed- to variable-rate mortgages. What people did cushioned the effect of the rate increase.
Maryland is one of the weakest states out there with respect to job growth and economic growth. It's not likely that housing will be very strong. The next couple of years will still be rough, not a tremendous turnaround. Overall, the state is growing, but just barely.
Robert M. Lefenfeld, senior vice president, Legg Mason Realty Group, projects that sales of new homes in subdivisions of 20 units or more will fall in the Baltimore area, from 10,400 in 1993 to about 8,700 in 1994. He expects about the same number of home sales in 1995.
The first quarter was a harsh quarter in terms of weather, then a week or two after the winter broke came the first bump of interest rates. It has not been the best year for housing. Why are sales down? It's a confluence of factors, some economic, some extraneous, and the natural ebb and flow of supply and demand in the market.
Selected counties did improve. Howard County is up 15 percent compared to '93 because it had more inventory, up in all product lines. Some counties declined. Anne Arundel County had a significant decline [from a high level of sales in '93] when it was still riding the crest of significant expansion of inventory. Now Anne Arundel County has come back down to a share of the market that's more typical.
We expect a similar market in '95 as we saw in '94. The employment news, although nationally it's certainly strong, in the mid-Atlantic and Washington area hasn't paralleled that. We see fits and starts in the housing market with levels similar, and possibly a slight decline.
The market share of townhouses and multifamily increased in '94. Even with the increase in interest rates, the more affordable product took the greater proportion of the market. That might reverse next year with higher rates.
Chang M. Kong, associate professor of economics, Towson State University:
With these rising interest rates, the housing market will be affected more than any other sector. It is very sensitive to interest rates. I expect sales will decline in '95 and also in '96. My RTC guess is maybe 1 percent or 1 1/2 percent and the following year another 1 percent for the state. The Baltimore region is not much different from the state.
Interest rates went up beginning in February of this year and were up five or six times. . . . This impact is starting to show up now. It will be more fully felt by the housing sector in '95, and remnants of that impact will carry through to '96.
Thirty-year rates will probably remain slightly below 10 percent for the time being, later we don't know.
Bob Coursey, marketing director, Ryan Homes:
The first assumption is that there will probably be some interest rate stability by the second quarter. In the short term, we may see a minor increase in the rates, but there's more comfort in the intermediate term and some stability. That's definitely going to help the market. People aren't as concerned with what interest rates are as much as where they're going.
The affordability index is still very high, but people lose confidence. People . . look for stability. When they start out house hunting, they want to know the monthly payment will be the same when they move in.