Interest rates bound to go up in 1994

Real Estate Weekly, Jan 26, 1994 by Ric Katz

To Mark Twain's favorite (and only) certainties - death and taxes - we must add, for this year at least, rising interest rates.

We can reverse Newton's Law of Gravity - what goes down, must go up - and talk about the freight train we see at the end of the tunnel, but the most important thing the U.S. homebuilding industry must do is prepare, and prepare a strong counterattack now for the day when low rate mortgage no longer are a sales tool.

Too often real estate gets caught at the butt end of great economic cycles. This time we can't afford to react and lose momentum. So here's my plan for continued prosperity - or at least, survival.

* Take stock of your market. Survey buyers and real estate agents about how a mortgage rate increase will affect buyers directly, and whether they think the local market can absorb an increase of up to 250 basis points. This should give you an idea of the impact on sales, and you should incorporate some worst-case scenarios into your financial planning.

* Take stock of local businesses that are major job sources in the target buying community. Are they interest-rate sensitive? What are the companies' projections in terms of hiring vs. lay-offs? If possible, take their economic guru to lunch.

* Although a rate rise of two points would still keep interest rates on the low side, the softness of the economic recovery - layoffs are grabbing more headlines and making many people nervous, while hirings are done quietly - makes any increase a potential market - buster. So go back into your bag of tricks, or call your marketing consultant and discuss what can be done when this happens. This may mean bringing back some old crown pleasers such as buydowns.

* While interest rates may not start their ascension for another three-to-six months, it is never too early to start lobbying our friends in Washington for stimulus packages. This can include tax breaks like allowing IRA money to be used for downpayments or creating housing bonds, or a savings-bond like instrument that would allow people to defer taxes while saving up for a new-home purchase.

Remember that 1994 is a mid-term election year for our Washington representatives. Housing once again has emerged as a cornerstone for the national economic recovery. Elected officials will find it in their interests to keep the economic recovery going, weak as it seems now.

We should use our good offices and common sense to remind them of what may be needed to help real estate counter the potentially crippling effects of higher rates.