The stakes are high for San Diego’s housing market as the Federal Reserve tapers the national economy off super-low interest rates.
Some experts think interest rates have been held back more by sluggish global growth than by Fed stimulus, so the “taper” that began this month won’t matter much. Then again, nobody can reliably forecast short-term rate movements.
And there’s little question that higher rates would hurt potential homebuyers. Already, skyrocketing mortgage payments may have chased away enough demand to halt price growth.
Further increases would pile a new problem onto the region’s housing market, which is distorted by a chronic supply shortage and soaring costs caused by local and federal government polices.
Waiting has certainly punished potential buyers lately. A typical new mortgage in San Diego County hit a modern low of $1,150 a month in February 2012, but by last month it had jumped nearly 47 percent to $1,695.
Most of the increase came from home prices, which surged 38 percent in less than two years.
Last summer the action shifted to interest rates, which have climbed from 3.5 percent to nearly 4.5 percent for the average fixed-rate, 30-year mortgage. That run-up started in May, when Fed Chairman Ben Bernanke outlined his plan to gradually reduce bond purchases the central bank began in September 2012 to keep rates low.
Maybe it’s a coincidence, but San Diego’s soaring housing market leveled off at almost precisely the same time.
The median price has inched up less than 1 percent since June, when it was $416,500, to $420,000 in December, according to DataQuick, a San Diego-based reasearch firm.
In contrast, the median had shot up 36 percent before the announcement from $305,000 in February 2012, when the typical payment reached its low.
Now that the Fed has begun its “taper,” what comes next is anybody’s guess. There are lots of moving parts in San Diego’s housing economy.
On the bright side, many experts see little risk that interest rates will skyrocket as they did in the early 1980s, when the Fed cranked up rates to tame high inflation. Indeed, Bernanke has warned that inflation is too low.
“I would tell people not to panic on interest rates; they aren’t going to be going up very much,” said Christopher Thornberg, founding partner of Beacon Economics in Los Angeles. “We have a world that is awash with capital, and not much demand for it for a variety of reasons.”
Bernanke has said the Fed will effectively be stimulating the economy until it stops buying bonds completely and begins to raise short-term interest rates, probably not before 2015 or beyond.
His successor, Janet Yellen, shares that view. Both are worried about inflation, which slumped to 0.7 percent in October, well below a 2.5 percent target.
Meanwhile, academics are debating whether the bond purchases have influenced interest rates all that much. A recent paper by Fed economists found a modest effect. Others say the policy has driven market psychology, pointing to this summer’s jump in rates.
Leave a Reply