New Math Pencils Out Stable Prices, Lower Interest Rates Give Sluggish Home Market A Boost

Suddenly, the local real estate industry is a beehive of mathematicians abuzz with one equation:

Steady housing prices multiplied by declining interest rates equals greater affordability.

It’s a lesson they are ardently trying to broadcast.

“I think it’s a great time to buy a home in Spokane,” said Ron McKay, manager of the BancPlus Mortgage Corp. office in Spokane.

BancPlus, a subsidiary of Barnett Bank, opened in Spokane last July. Many mortgage companies, as well as contractors, have flocked to the area in the last few years to take advantage of boom times in housing.

But latecomers like BancPlus arrived at the worst possible time, said McKay, a 20-year veteran of the market.

The Federal Reserve Bank was halfway up a seven-step staircase that raised short-term interest rates 2 percent in 1994.

Rates on 30-year mortgages that had bottomed at less than 7 percent in October 1993 briefly touched 9.5 percent by last November.

On a 30-year, $100,000 loan, just a 1 percent jump in rates means about a $70 hike in monthly payments. On a $50,000 loan, the difference is $35.

As credit tightened, home sales nationally and in Spokane staggered.

“The market just went to pieces,” said Gary Marks, president of the Spokane Mortgage Bankers Association.

Double-digit price appreciation that put the Spokane market among the nation’s hottest ebbed to single numbers. By April, the climb stalled completely, and sales were down 30 percent from year-ago levels.

Construction plummeted. Spokane County issued 409 permits for single-family homes through the first five months of the year, down more than one-third from activity one year ago.

The inventory of unsold homes in the county reached 2,400, the highest level since the start of the sales explosion. And homes on the market less than seven weeks in 1993 were looking for buyers 11 weeks after signs first went up.

Now, say McKay and others, the market has begun to turn around. Interest rates have dropped off dramatically in the last two months - to less than 8 percent. But prices, restrained by inventory, have remained fixed.

The result, in keeping with the affordability equation, is homes more Spokane wage earners can buy.

Jesse and Marci Jones took the plunge Thursday, when they came to terms on a home on East Heroy.

“It took a lot of looking,” said Marci, a records analyst for The Guardian. Homes in their price range, around $80,000, have become scarce, and the seasonal nature of Jesse’s employment made qualifying for their Veterans Administration mortgage tricky.

But the payments will be little more than their rent, she said.

Would-be buyers like the Jones are the mostly likely to benefit from lower interest rates.

Tom Sackmann, president of Action Mortgage Co., figures a 1.5 percent rate decrease on a 30-year mortgage increases the number of eligible buyers by 10 percent.

“Our activity is up significantly,” he reported.

Lower rates also add to the pool of homeowners who can benefit from refinancing, a major source of business for many mortgage companies.

Action, a subsidiary of Spokane-based Sterling Financial Corp., concentrates on new loans, Sackmann said, but refinancings are becoming a greater share of the mix.

He said much of that activity has been generated by those who bought homes in the last year using an adjustable-rate mortgage.

Although ARMs give borrowers a break on rates up front, some start adjusting toward current interest rates as soon as six months after they are taken out.

Sackmann said some ARM borrowers have found themselves paying rates close to those on fixed mortgages, with no assurance their payments won’t go higher.

“They can refinance at about the same rate and eliminate the uncertainty,” he said.

Sackmann predicted a surge in refinancing activity by ARM and fixed-rate borrowers alike if rates slip another half-percent.

McKay said current rates, if high by comparison with those available at the end of 1993, are as low as those that prevailed during the housing boom of the late 1970s.

But, he said, the low number of inquiries regarding mortgages indicates there is a widespread perception rates remain high.

“The market has a tendency to have a delayed reaction,” agreed Don Walker, manager of Cherry Creek Mortgage.

Homes were selling at a faster pace a year ago than today despite the fact mortgages were more expensive, he said.

Concerns about the national economy, Walker said, are dampening buyer spirits in Spokane even though the Inland Northwest continues to prosper.

“It’s all a matter of perception,” he said.

The misconceptions are not limited to potential buyers. Real estate officials say builders and sellers of existing homes are adjusting to the less frantic market.

“I think we’re still in transition with some sellers as to what is a market price,” said Bev Gates, president of the Spokane Association of Realtors.

Some ignore the leveling off that has taken place, she said. Although they likely will not have to accept less than they would have a year ago, neither will they get the additional 10 percent-plus that became the routine year-over-year increase during the early 1990s.

“It’s not the time for sellers to reach,” Gates said. “It was that time two or three years ago.”

She said the market, with about a six-month supply of houses at the current sales pace, is properly balanced between buyers and sellers.

Contractors, who had helped push inventory ahead of demand, are scaling back, she noted.

“I wouldn’t think you’d see a lot of spec building going on except to replenish stock,” she said.

But John Titchborne, manager of Washington Mutual Bank’s home loan center in Spokane, said some builders are coming in for loans as they work off their inventory and want to finance new projects.

Market psychology is starting to reverse, he said.

“There was virtually no activity in December,” Titchborne said. “Everyone was getting a little discouraged.”

He said home buyers react more quickly when rates are going up than they do when rates are dropping.

John Becker, head of Windermere Realty in Eastern Washington, said the market for homes priced below $160,000 has remained active. Pricier homes are moving more slowly, he said.

But, Becker said, the overall market is good, with inventory allowing buyers to be selective.

“What we’re seeing right now is what business should be like normally,” he said, adding that comparison with the last year or two is unrealistic.

Phil Kuharski, a longtime observer of the Spokane economy, said there is little reason to believe a recovery in the local housing market will be undermined by an economic slump.

In fact, a national slowdown could help the more-stable Spokane economy by forcing the Fed to push interest rates even lower.

The Spokane economy added 4,700 jobs last year, Kuharski said, and so far this year is on a track to add another 4,000.

“Spokane is having it’s own soft landing,” he said. “We don’t seem to be turning into a recession.”

But he said contractors, who took out more than 2,800 housing permits in 1994, are probably going to have to scale that number back toward 2,000 as the in-migration that fueled much of the area’s economic expansion slows down.

, DataTimes ILLUSTRATION: Graphic: Home interest rates dropping