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Higher interest rates not cooling off housing market
By Kathleen Dayton
Staff Writer
The nationwide construction avalanche and home-buying frenzy that has accompanied low interest rates for the past couple of years is cooling off as interest rates begin to perk up.
As the sizzling market wanes, is there trouble ahead for the area’s many commercial and residential development projects, and will lenders be faced with more foreclosures?
Area economists and industry experts agree that rising interest rates will have some impact on construction and home sales, but they see the coming changes as a normalization of the market rather than a drastic turnaround.
“This needs to happen,” said Frank Finlaw, division president of Beazer Homes, which has a large investment in Lowcountry projects. “What we’re going through now is kind of an adjustment. Everybody talks about a stock market correction, but we need to experience a real estate correction right now. Prices have gone up artificially.”
Some people may get nervous if interest rates rise and people in lower income brackets may not be able to qualify for home loans, Finlaw said. Still, he doesn’t see the impact as severe.
“Financing is so much further along than it was back in the late 1980s and 90s,” Finlaw said. “There are so many alternatives right now. It’s more about consumer confidence and inflation.”
While property values may not experience the dramatic upswings of the past year, Finlaw thinks they will still increase, but in a more orderly and sensible way. He believes the Charleston area is different from other national markets that are cooling more rapidly.
“You’re not going to see values go down in this area along the coast,” he said. “You had some markets that were highly investor-driven, but that’s not typical of the Charleston market. The boom we’ve had here in real estate really has been a market-driven demand.”
Philip Ford, president of the Trident Area Home Builders Association, agreed that some home buyers may balk at higher interest rates, but the rising rates will not adversely affect the Lowcountry’s real estate market.
“There are a lot of high-volume national builders here, and I haven’t seen them saying, ‘Hey, we’re really hurting.’ The trend in people moving to the East Coast from other areas, we haven’t heard that’s changing course,” Ford said. “I think South Carolina is still in a great position because of the fact that we aren’t as hurricane-prone. Knock on wood.”
Stacy Hornstein, development director for the 1,700-acre Carolina Park in Mount Pleasant, said potential retailers who have their eyes on the location have mentioned rising interest rates and the possible impact on the project, which is a mix of commercial and residential space.
“The answer is, we are still at historically low rates,” Hornstein said. “There was a time in the early 1980s when I thought I’d never see mortgage rates under 10 percent, and we’re not even close to 10 percent.”
Hornstein is more worried about other costs rising, including the price of building materials and petroleum-based products such as asphalt and PVC pipe. Other fees, such as architectural design fees, permitting fees and those associated with entitlement processes, are much more expensive in relation to the interest rate on a project, he said.
“The interest rate is not as large a line item as it used to be,” Hornstein said. “Until it goes up quite a few more notches, it’s still reasonable. It’s not an impediment right now.”
Carolinas AGC, a regional chapter of the Associated General Contractors of America, on June 9 released an overview of the construction industry in the Carolinas. The trade group posted its strongest and most broad-based advance during fourth quarter 2005 with a 2% rise on improved construction business conditions and a strong labor market, with constant regional financing activity.
Carolinas AGC expects business growth in both North and South Carolina during 2006, although South Carolina is outpacing North Carolina in construction by a small margin.
In South Carolina, the trade group found Lowcountry contractors more pessimistic than in the Upstate, with more concerns about rising wages, fewer skilled workers and higher costs for materials in 2006.
A slight rise in interest rates could ease some of the strain. Economist Al Parish, director of the Center for Economic Forecasting at Charleston Southern University, said higher rates will help the area’s real estate market cool to a much more comfortable level.
“Builders will be happier because they won’t be pulling their hair out trying to find qualified help,” Parish said. “The impact in terms of real estate might actually be good. It might take some of the extremely hot market and make it warm. I do not expect to see home permitting decrease in the Charleston area. The rate will slow, but still the number of homes will continue to rise.”
One concern left from the extremely bullish market could be a pool of consumers stuck in adjustable rate mortgages that will balloon when they adjust tohigher interest rates.
“I do believe a number of homeowners have gotten themselves entangled with variable rate loans and interest-only loans,” Parish said. “Within one year you will very likely see the variable-rate mortgage above the fixed-rate mortgage. If your current interest rate is within a point of the fixed-rate mortgage, you should go for the fixed-rate and remove the risk. These artificially low rates we had two years ago allowed people essentially to buy more house than they could afford, and now the chickens are coming home to roost.”
Federal Reserve Chairman Ben Bernanke recently remarked that the central bank would remain vigilant in fighting inflation. The federal funds rate, which is the interest rate charged between banks on overnight loans, does not directly affect mortgage rates but influences borrowing costs and can cause credit card rates, as well as the prime rate on business loans, to rise.
On the positive side, banks may raise the rates paid on certificates of deposit and money market funds.
The Federal Reserve pushed the key rate up June 29 by 25 points to 5.25%
Despite a 16% decrease in foreclosures in South Carolina in May compared to a year ago, Mark Vitner, a senior economist with Wachovia Back, foresees a rise in foreclosures across the country simply because more homes were sold in the past couple of years. However, he doesn’t think a cool-down in construction and real estate will have an adverse affect on the Lowcountry. While construction is a big part of the area’s economy, Vitner thinks it makes up about 15% of the economic picture.
“I think Charleston is going to hold up reasonably well, because we’ve had a good bit of industrial activity. On top of that, there’s very little evidence of overbuilding of either residential or commercial construction,” Vitner said.
It is normal to see houses that were once selling immediately now staying on the market longer, Vitner said.
“Houses normally stay on the market five months. Now, they’re selling in three to four months,” Vitner said. “That’s not weak by any standards. People might have to back off from the price they were asking a few months ago, but they’re still seeing reasonable price appreciations.”
Kathleen Dayton is a staff writer for the Business Journal. E-mail her at kdayton@charlestonbusiness.com.
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