Last January, I was asked to make some projections about the real estate market. I went back to my column from last year to find out how accurate my little crystal ball had been, and I was pleased to learn that I fared fairly well. I had predicted that interest rates would go down -- although not because of the economy, but rather because of the forthcoming presidential election. I also predicted that shared-equity loans would become more popular, and also that cooperative financing finally would become a reality.
Because I seemed to do so well last year, I am going to try my hand at some predictions for 1985.
As always, I have to point out that I am neither an economist nor a fortune-teller. However, as I have often suggested in the past, I sometimes feel that there is no real difference between those two.
Interest rates always are a topic of conversation, and I am quite concerned about the state of the economy. Currently, interest rates for a fixed 30-year loan are hovering around 13 percent. Interestingly enough, last year at this time they were about half a percentage point higher. I submit that, by the middle of spring, we will see interest rates creeping up slowly.
Furthermore, the new kinds of mortgage instruments, and specifically the adjustable-rate mortgages, are gaining in popularity with the consumer, but losing their attractiveness to many lenders. The initial interest rate for ARMs is often considerably lower than the rate for a fixed 30-year loan, but the lender reserves the right to increase or decrease the mortgage periodically (for example, every year or every three years) depending on the state of the economy.
Last year, we were still in the preliminary stages of understanding how ARMs worked. Not all lenders had caps on their loans, and, indeed, significant congressional and consumer outcries was heard about some forms of ARMs. Today, from my own experience, I believe that most (if not all) lenders have caps on their loans. The cap comes in two forms. There is the annual cap, whereby the interest rate can go up only so many percentage points per year (or per adjustable period), and there is also the lifetime cap, whereby the interest rate increase cannot exceed a fixed number -- usually 5 or 6 percentage points -- over the lifetime of the loan. These two caps are critical, and should be carefully considered by anyone interested in obtaining an ARM.
We have moved rapidly into what is known as the "age of the Yuppie" -- which, of course, is an acronym for young upwardly mobile (or urban, depending on your preference) professional. This group is clearly interested in the "good life" and included in this life style is the desire to own real estate. Often, this real estate comes in the form of cooperative and condominium apartments, but the single-family home is clearly still of interest to these consumers.
But when these consumers look at interest rates and the high cost of housing, especially in the Washington metropolitan area, they find that they must use creative financing techniques. We are still seeing a considerable amount of seller take-back financing, whereby the seller assists the purchaser for a period of years with the available financing.
Additionally, the shared-equity concept has moved into full gear -- despite the fact that the Internal Revenue Service still has not issued final regulations on the subject. As this column has discussed on many occasions, the shared-equity approach is a way of having two people purchase property, one being the owner-occupant and the other an owner-invester. There are significant tax benefits which the owner-investor can obtain, and this concept will continue to be a very popular way of purchasing property.
Last year, I predicted that cooperative financing would become more available, and I am pleased to report that my predictions were correct. As reported recently in this column, cooperative financing is now a reality, and in my opinion cooperatives will be just as popular as are condominiums.
One area that is ripe for change lies in the area of community association law. Condominium and cooperative owners are constantly fighting among themselves, and with their elected board of directors. I predict that this year we will see a signficant increase in litigation and arbitration involving the many signficant issues affecting community associations.
Finally, we have the uncertainty of congressional action in the tax area. While I have no prediction as to whether Congress will enact major tax reforms this year, I think it is safe to predict that, whenever this reform is enacted, it will have little impact on the deductibility by homeowners for their own residential property. I think that even the reform-minded members of Congress are well aware that they cannot take away from the American public the right to deduct their mortgage interest and tax payments on their personal residence. After all, Congress created this great American dream years ago to encourage home ownership, and no one wants to shatter this dream.
Nineteen eighty-five will be a good year for real estate investment, although appreciation will not be significant. I do predict, however, that property values will at least be keeping one step above the inflation rate -- which at least gives comfort to many investors.