Is the 10% Mortgage Around the Corner?
by Jim Scott

So the prime rate is approaching the dreaded double-digit area. The latest increase was expected but what is troubling is that the Federal Reserve Board has hinted that when they meet in June they will again raise rates.

The stock market continues to provide a roller coaster ride, unfortunately mostly downhill. The wealth effect in reverse may be in the offing- hurting real estate sales.

Curiously the real estate market seems to be ignoring these events. So why are buyers continuing to bid up the price of all real estate in spite of the donnybrook in the financial markets?

How Real Estate Prices Move

They move slowly. Over the past few years because of the information revolution and the dramatic changes in the global financial markets, cycles change quickly and often. Real estate prices are heavily influenced by those markets but they respond differently to changes in those markets.

Stock prices, for example, can react in minutes to a bank failure in some Asian country. It will hardly slow down the number of people coming to my next open house. But like the butterfly flapping its wings, there eventually will come a time when that bank failure will affect the price of your real estate.

Looking Back

1990 was an interesting year for real estate and not unlike 2000. It was a year when real estate in San Diego began to feel the effects of changes in the financial markets. Although there were lots of warning signs in early 1990, buyers still eagerly bid up prices well into the latter part of the year. By early 1991, the 1980's party was closed down by a combination of external events, none of which we locals had any hand in.

By 1989 the threat of inflation had become real as the economy recovered robustly from the 1980-1984 recession. The Fed embarked on a campaign, just like today, of slowly escalating rates. We entered our recession when Federal defense expenditures were sharply curtailed following the end of the Cold War.

The severity of the recession is a painful memory for many people. But there are some key differences which go to explain why the buyers seem to be shrugging off the miasma of Wall Street.

Why We Are OK-For Now

I can see two reasons for hope. As noted above, real estate as always reacted slowly to financial events. Certainly the Fed is capable of shifting course on interest rates. But there is I believe a more important reason for optimism.

Prices have increased over the past 24 months. But that is only part of the story. Relative to the price binges of the late 70s' and 80's, the rate of increase during the past three years has been relatively modest. We simply have a shorter distance to fall. Or more importantly, prices today, adjusted for inflation, are barely 5 to 6% higher than they last peak.

You can reach Jim Scott at his office, conveniently located in the heart of Mission Hills, at 1111 Fort Stockton Drive. Scott & Quinn is the oldest full service real estate firm in Mission Hills and is still locally owned and operated. Jim has been a homeowner in Mission Hills since 1976. He is married and has two boys. He can be reached at 296-9511.

Scott & Quinn features a professional property management division as well as a sales division.