If you've had your fill of grim economic headlines and even grimmer projections for the housing market--talk to Peter Treadway of Wall Street.
The chief economist for the New York investment banking firm of Cralin Associates, Treadway has never been accused of being a Pollyanna, and he's certainly not a cheerleader for real estate. For example, he vigorously opposes Congress' "spendthrift" moves this spring to subsidize mortgage-interest rates for hundreds of thousands of moderate-income buyers.
But Treadway has a view of the coming year in real estate that homeowners, sellers and buyers ought to know about. It's cautiously upbeat. And it just might be right.
Prior to joining Cralin he was chief economist for the Federal National Mortgage Association (Fannie Mae) in Washington. His technical analysis of where we are in housing, and where we're headed, can be boiled down into three points in plain English.
1. Mortgage rates will decline slowly but steadily throughout the next 12 months. The drops won't be dramatic enough to break out the champagne, but they'll coincide with a shift in consumers' market psychology that should produce sales.
Specifically, Treadway looks for adjustable-rate mortgages (ARMs) at banks and S&Ls to be available in the 13 to 14 percent range later this summer, and to decline into the 12 to 13 percent range by next summer. Conventional 30-year, fixed-rate loans, by contrast, will drop to the 15 percent level this summer, and to 14 percent next year.
Treadway assumes "some form of accommodation" in the current budgetary impasses on Capitol Hill, but also figures sizable deficits for the next several years. The most important downward forces on rates, he believes, are the recession itself and the long-term prospects for continued low rates of inflation in the economy overall.
As a result of the steady, marginal declines of mortgage rates this year, he says, "There's no question that borrowers will finally see the superiority of the adjustable-rate mortgage over the fixed-rate" mortgage. With loan rates headed downward, they'll see actual declines in rates on certain types of adjustable loans. That, in turn, should begin to reverse the long decline in mortgage volume at S&Ls and banks.
2. The public is nearing the end of a protracted period of economic shock and paralysis: shock over mortgage rates of 16 and 17 percent, shock from owners over the flattening out and nominal declines in market values of their property.
"It has taken a while for many owners, particularly those who bought in the 1970s, to understand that the rules truly have changed," Treadway observed. "Inflation rates in housing are just not going to bounce back to what we all experienced four and five years ago. I think that's finally begun to sink in. I think it's also leading to more realistic pricing of homes, both new and resale. That, in turn, should begin to slowly stimulate sales activity."
The same sort of "post-shock" syndrome should show itself in the mortgage market. Whereas rates of 14 and 15 percent were completely unacceptable a year ago, more and more consumers "have come to understand that mortgage-rate giveaways by the lenders are a thing of the past. We'll simply never see that situation again because lenders got so badly burned." But a 12 or 13 percent adjustable-rate loan--in the cold light of day in 1982 and 1983--may be quite acceptable.
3. Absent a full-fledged depression, which Treadway doesn't expect, "The housing market has hit bottom already." From here on in, assuming no cataclysms like oil embargoes or wars, the picture should get brighter, quarter by quarter.
What "amazes" an economist like Treadway is the resiliency of the real estate market, in the light of the economic pressures that have been arrayed against it in the last 2 1/2 years.
"There's been no collapse in prices, there have been no mass foreclosures or anything resembling it. With unemployment at 9.4 percent, 10 million people out of work and mortgage-interest rates over 16 percent, the small declines in real-estate prices are really quite extraordinary when you think of it," he said.
"Real estate ought to have gone bust under most disaster scenarios," he adds, "but look at it. It's hanging in there because Americans value their homes so highly. Sure, people have doubled up, postponed purchases, and postponed moves, but not for the long term. The underlying market demand for new houses can't be kept pent up like this indefinitely. You'll see what I mean before the year's out."
We'll be watching.