Fall Real Estate 2003

Publication Date: Wednesday, October 8, 2003

Mortgage rates head up
No longer at the lowest in decades, but still low

by Sharael Feist

The American dream: get married, have two kids, a dog, and buy a house with a white picket fence. Owning a dream home might be fading for some interested buyers due to the recent rise in mortgage rates. While others, who had been sitting on the fence about making a purchase, seem to be jumping off and buying before the rates get even higher.

Ray Hixson recently purchased a home in Mountain View, despite the higher mortgage rates, for eight times as much as his first house in Tennessee.

Although it seems likely that the increase would force buyers to invest in a smaller home, look into less desirable areas, or buy a townhouse or condo rather than a detached home -- that doesn't always seem to be the case.

"There has been an influx in purchases," said Catherine Ballantyne, mortgage broker for Absolute Mortgage Banking in Palo Alto. "This reflects that buyers who were previously undecided are buying."

This was the case for Rick Caruso, a stock trader working in Mountain View. He started looking for a home in June but didn't end up buying until August, after the rates increased significantly.

Catherine Ballantyne, with Absolute Mortgage Banking in Palo Alto, says deflation could take a while to impact the local market.

"I decided it was time to pull the trigger," Caruso said. "If the interest rates would have risen too much it could cost us $200 more per month, which would be taking food off our table. We had to come up with a plan and make a deal."
The deal was not what Caruso had originally envisioned -- a detached home. Rather, he settled for a three-bedroom condominium for less than $400,000.
"With the rise in mortgage rates, the cost of owning a house was going up," he said, "even with decreases in house prices. With a condo, we were able to buy a newer home for less money."

According to Absolute Mortgage, in early June the rate for a 30-year fixed loan less than or equal to $322,700 was 4.875 percent, compared to 6.0 percent in early September. Between $322,701 and $1,000,000, the 30-year fixed loan was 5.5 percent versus 6.5 percent in September.

This means that a buyer with a $500,000 loan would have paid a monthly mortgage of $2,291 in June with a 5.5 percent rate, but would now be paying $2,708 a month with a 6.5 percent interest rate. By not making the purchase a couple months sooner, a buyer could potentially have to pay more than $400 more per month to own a home now.

Although Ballantyne feels that the impact of rising mortgage rates could cause buyers to qualify for less and force home prices in the Bay Area to readjust to fair value, she said, "Palo Alto is a microcosm -- people are not as apprehensive. Deflation will take a while to take effect."

Ballantyne also states that a large percentage of buyers are looking for "fixer-uppers" so they can build more equity, which could offset the deflation of the home price. She also points out that although condos or town homes might be more affordable with the higher interest rates, they don't appreciate as much and therefore might not be as attractive to some buyers who are able to afford less.
Bob Gerlach, vice president and manager for Alain Pinel in Palo Alto, points out that although interest rates have increased, the rate is still relatively low compared to previous years.

"Relative to the last 10 years, 6 percent is still cheap," Gerlach said. "In 1981-82 it was at 12-18 percent. Buyers are still trying to go for the best value; not go for less. There has been an increase in activity because the demand (for real estate) is still strong."

Ray Hixson, a 35-year-old employment lawyer at Fenwick and West in Mountain View, purchased a four-bedroom home in early August for more than $800,000 with an interest rate of 5.75 percent.

For Hixson, the rise in mortgage rates wasn't a factor. He would have bought the same house even if it meant paying a higher rate, he said. After he was notified in July that the owner of the home he was renting was going to sell it, he decided to purchase his own home rather than moving into another rental.

Originally from Tennessee, in 1997 Hixson purchased a four-bedroom home there for about $100,000. He moved to the Bay Area in 1998 and believes that paying nearly a million dollars for the same size home here is well worth it.

"It's more expensive here, but it's a great place to live," said Hixson, "due to the weather, the businesses to work for, the outdoor activities like Tahoe, the beach, the wine country, the City, and also pro sports. You only live once. You have to be happy."

As for the sellers, things aren't moving as quickly as some of them would like. Ballantyne said that homes are not selling as fast as they have in the past and the time on the market is increasing.

"With a house that has been sitting, people's perception is 'What's wrong with this house?'" she said.

She also mentioned that in 2001 buyers were offering more than the asking price and homes were moving faster. However, now she sees an increase in inventory due to people selling their homes because they are either being priced out of the area or because of the sluggish economy.

Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy, said that if the mortgage rates continue to rise and if there is not an increase in job growth, the prices of houses will decline within the next six months.

"Housing prices here have been held up on the hope that the economy will recover," said Levy. "Normally when there is a decrease in jobs, there is a decrease in the price of homes."

Probably the biggest impact of the rise in mortgage rates has been in refinancing. Carl King, mortgage broker for Mayfield Mortgage in Palo Alto, said refinancing is on the decline.

"In mid-June, the majority of borrowers could refinance, but now it makes sense for less than 30 percent of homeowners to do so," he said, adding that shorter-term loans haven't been affected as much.

"Buyers on the edge of qualifying are using shorter-term loans for lower monthly payments," he said.

So, it seems as though for most buyers the American dream is still achievable. They just might have to do without the white picket fence.

"Palo Alto is a microcosm -- people are not as apprehensive. Deflation will take a while to take effect." -- Catherine Ballantyne, mortgage broker