Housing Outlook Dimmer on Rate Fears; Office to Rally

The prospect of higher rates has caused jitters among Orange County’s homebuilders, commercial developers, real estate brokers and construction workers.

Low mortgage rates have contributed to a housing boom during the past three years and helped shorten the last recession.

Attractive rates also have contributed to the frantic construction of small commercial buildings for sale, for much the same reasons as housing.

Higher rates could change all that.

Uncertainty about how fast and exactly when rates will rise only adds to anxiety among real estate players.

The Federal Reserve Bank is widely expected to raise short term rates another point or so during the next 12 months. In 2004, a 1.25 basis point rise in the federal funds rate to 2.25% didn’t budge long-term rates.

Economists at Chapman University foresee 30-year mortgage rates hitting 7.2% by the end of 2005, up from about 5.8% today.

Higher rates and tepid job growth in OC should lead to housing prices here dropping 7.4% in 2005, the first decline since 1995, according to the university’s A. Gary Anderson Center for Economic Research.

Chapman’s not the only one predicting an end to price hikes in housing.

In October, California State University, Fullerton re-searchers said local property values could drop by as much as 20% during the next two years. And the UCLA Anderson Forecast predicted the housing market would cool in Southern California in 2005, but stopped short of projecting price declines.

Chapman also foresees a 10% decline in housing construction to 8,405 houses, condominiums and apartments next year.

Homebuilders don’t share the gloomy prognostications of local universities.

Jonathan Jaffe, who heads operations for Miami-based Lennar Corp. from Aliso Viejo, said the impact of higher mortgage rates only can be judged if one knows why rates are rising.

If interest rates rise amid a booming economy, job growth and income gains, that’s OK, Jaffe said. But if rates rise as a result of monetary policy absent those positive factors, “that wouldn’t bode well,” he said.

Jaffe remains optimistic about 2005, saying that demographics such as population growth during the next decade should be even more favorable to housing than the past decade.

On the office side of real estate, the market should continue to improve in 2005, according to economists at the University of Southern California. The market is seen benefit from economic expansion and lower vacancies, according to the university’s Casden Real Estate Economics Forecast.

University experts said stronger job growth is needed to put the office market on really solid footing. Still, researchers said landlords should begin to see improvements in office rents during the next two years.

The sentiment is echoed by brokers. Grubb