Look for Possibility of Increased Mortgage Rates Next Year if Economy Continues Recovery

Dr. Leonard Zumpano, professor of finance and director of the Alabama Real Estate Research and Education Center, says home buyers can look for mortgage rates to increase next year … if the economy continues to recover and the competition for loan money increases.

Zumpano predicts the Federal Reserve will no longer need to use monetary policy to stimulate economic activity and, if anything, may be on guard against a rise in inflationary price increases. “Rising economic activity will also again put upward pressure on home prices. Throughout most of 2002, falling interest rates have helped sustain housing prices even though the increase in income did not keep pace with home price appreciation,” Zumpano said.

He also predicts that rising mortgage rates and slow growth income will cause housing affordability to decline in 2003 and may put some downward pressure on home prices, at least in some locations.

“From a longer term perspective, the residential housing market will remain strong throughout the decade primarily as a result of demographic factors,” Zumpano said. “The baby boom generation, some 76 million strong, is increasingly becoming empty-nesters, who are in, or fast approaching, their peak earning years. With their kids graduating college, a great deal of pent up consumption, and income to burn, they will be moving up to larger, more expensive homes and buying second homes in vacation locations.”

Zumpano said domestic demand will be supplemented by a continued migration into the U.S. and growth in the number of single, female heads of households, who have twice the rate of homeownership as their male counterparts. “So, although 2003 may see a slowing housing market, the long term fundamentals are strong and will prevent a serious shakeout in this market,” he said.

The current year ends with interest rates at a 41-year low as the Federal Reserve tries to revive a sputtering economic recovery. Throughout the year, and for most of the last decade, the housing market remained strong, first because of the positive net wealth effect of a skyrocketing stock market, and now as a shelter from economic adversity, Zumpano said. Many individuals hurt by the fallout in stock are seeking to protect their wealth by investing in real estate. In some local real estate markets, the resulting increase in prices has raised the possibility of a real estate bubble. For most of the country, however, housing markets have remained stable, while in a few other markets housing prices have been moderating during the last quarter of this year.