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Assessing the Home-Buying Market : Head of realtors group warns that another interest rate increase could stall economic recovery in O.C.

August 22, 1994|DEBORA VRANA | Times Staff Writer

The Federal Reserve's move last Tuesday to raise short-term interest rates sparked some alarm among potential California home buyers. Uncertain whether to buy now before interest rates rise further or to wait for rates to drop, more home shoppers may just decide to do nothing. Given the severity of the real estate downturn in recent years, the housing market in California is especially vulnerable should rising rates depress home sales.

But Pat Neal suggests the Fed rate hike will not significantly deter home sales. Neal, a Garden Grove realtor for 22 years, is president of the California Assn. of Realtors, which represents 104,000 members in the nation's largest housing market.

In an interview with Times staff writer Debora Vrana, Neal noted that several major lenders cut rates on fixed-rate mortgages last week while raising the rates on adjustable loans, a move that could prompt a comeback in fixed-rate mortgages, which have recently lost ground to adjustable rate mortgages with their lower initial rates. Fixed mortgage rates slipped last Wednesday to 8.75% from an average of 8.79% the week before, while adjustable loans climbed to 5.81% from 5.76% the previous week. However, Neal predicted that any further spike in rates this year could mean trouble for the real estate industry and California's fragile economic recovery.

Question: The hike in interest rates last week has alarmed many potential home buyers, possibly causing some to shelve purchase plans, at least temporarily. What impact will this have on home sales in California?

Answer: The first time they increased interest rates in February, it had a dramatic impact on the market. People who were sitting on the fence trying to decide whether to buy or not took the plunge and bought. Since then, every time they've done it, we haven't seen that type of an impact.

So, I don't think we're going to see a dramatic impact on sales from interest rates. I think it's just the time of the year when sales get a little sluggish. People are getting their children ready to go back to school.

Everything is changing. It's the dog days of August. So, while the momentum may drop now, I don't think it is as a result of the interest rates, because historically we still have good rates. I think what we will see is that fixed-rate mortgages will stay pretty steady, they may even go down. But adjustable rates will go up.

Q: What will be the impact on the state and Orange County if rates rise again this year?

A: It will slow the recovery. We have been seeing a recovery in housing at least since the last quarter of 1993 and we've seen housing leading California out of a recession. In part, because there are so many things you have to buy when you buy a house--appliances, drapery, carpet, furniture, flowers, plants.

And 51% of our home sales in this state have been to first-time home buyers, and they tend to need more things. And that helped the recovery in California. Another rise in rates will impact Orange County very much. We were not ready in Orange County for the type of recession that we've been in. We just really did not think it would happen to us.

Q: What advice would you give to a potential home buyer right now?

A: I think I'd buy something now, while prices are still good. We've seen the prices firming and I think we've seen the bottom in prices. So I would say if they were going to buy, they had better hurry. The lenders are very anxious, because they don't have the refinancing market they did (last year). So, it is to the benefit of someone who is considering buying to seriously look at this market now.

Q: You have been a realtor in Orange County for more than two decades. How have you seen the local housing market change and where do you see it going?

A: One of the things I see happening that is positive is that we are much more affordable now. Something that worried many of us in the industry was when we became so unaffordable, with only 11% of the population at one point able to afford a home here. We were locking out our own children who might want to live in Orange County. We were locking out young families with children. Now that things are more affordable, we are seeing these young people come back into the market.

Q: What are home buyers telling your members these days?

A: They are concerned about the overall stability of the California economy. They are looking at houses as shelter and a long-term investment rather than as a speculative investment, as people were in the late 1980s. Back then, buyers would ask us if they could sell a home in a year for a big profit and get something else. And we're not hearing any of that now, which is healthy.

Today's buyers are concerned about schools, whether the neighborhood is safe. They are more concerned about quality of life rather than the size of the house. They want convenience and comfort. The house is a haven now.

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