It's difficult for the average American to get an accurate sense of where our economy is headed -- and where it is now -- these days. A complex web of economic indexes, taken together, paints several different pictures. Your vantage point changes if you're evaluating data that shows a recently bullish stock market in the same economic climate that produces some of the highest unemployment rates in decades, all in the shadow of the largest federal deficit in history. Estimates on the federal budget show a debt projected at $455 billion for this year, increasing to $475 billion next year.
Such quantitative assessments of the economy often leave average Americans cold, due to the numbers' inherit vagueness and the fact that such distant figures don't really hit that close to home. However, one number in the current landscape stands as a bright light to the typical taxpayer, especially homeowners: the interest rate. In late June, Federal Reserve Chairman Alan Greenspan announced another reduction to the federal funds rate (currently at 1 percent), which in turn has brought a prime interest rate of 4 percent, the lowest level since 1959. Interest rates are currently around 4.75 percent, though the figure can, and often does, change daily.
Two weeks ago, Greenspan told Congress, "We could very well be embarking on a period of extended growth," a fact he attributed to the low interest rates as well as to President George W. Bush's latest round of tax cuts. The chairman is not predicted, according to many analysts, to push for an increase in the interest rate until at least mid-2004. The Fed's economic forecast predicts that the economy will grow at a rate between 2.5 percent and 2.75 percent this year, with a sharp upturn in 2004 to between 3.75 percent and 4.75 percent.
Boiled down, the lowest interest rates in decades means consumers can enjoy the best deals on loans for mortgages and home improvements. The result is just what Greenspan intended: a steady boom in real estate across the country, a crucial component of the national economy (that in many other facets continues to falter).
In New Orleans, the housing market is in a frenzy of activity, local mortgage brokers and Realtors say, with the low rates compounding other growth factors, including the renewal of some of the city's urban neighborhoods and a seemingly insatiable demand for the architecture and charm of our historic neighborhoods. The low interest rates are also pushing the value of area homes upward, with the latest assessments showing considerable jumps in the average house's worth in parts of the metro area. Orleans Parish recorded a jump of 5.5 percent over 2002, second only to western St. Tammany Parish, which enjoyed an increase of 5.9 percent from last year.
Residents locally are taking advantage of the low interest rates in myriad ways, with refinancing of existing mortgages being the primary benefit. Many with lower incomes are moving into home ownership, when previously they could not afford to do so. Homeowners are drawing against their equity (the money they've already put into their house) to secure loans for everything from new roofs to new boats. Wealthier citizens are upgrading to their dream homes, focusing their investment dollars on real estate instead of a stock market many still view as shaky.
"Right now is the perfect time to refinance for just about anybody," says Clay Colton, a local mortgage broker with Alternative Lending Solutions. "A good rule of thumb is that if you can reduce your interest rate by one full percentage point, then it's a good decision to refinance. Of course, it's all on a case-by-case basis, but everyone should look into how much money they could save."
The savings, in many cases, are substantial. Interest rates at some points in the late 1980s hovered as high as 18 percent and, just five years ago, were often in the upper-8 range. Reducing the interest rate on a mortgage by 1 percent on a home valued at $100,000 means a monthly note reduced by $100; a 2 percent drop on a $200,000 home means a saving of $400 month. With such savings there for the taking, why so many people are opting for a refinancing of their existing mortgage is simple.
"There are so many refinancing transactions going right now, every single lender is pretty much swamped," Colton says. Because of the heavy load of loans pending, Colton says the "underwriting" process in which banks or other lending institutions handle the paperwork, "in a non-boom period can be as short as four to five days. Now, we're seeing the process take as long as 45 days because of the sheer volume of loans they're handling."
Colton sees a lot of people opting to refinance to extract liquid assets, or cash, against their equity in order to pay off debts, including ones incurred on credit cards, which often have interest rates of 18 to 20 percent. An added plus in this arrangement, Colton says, is that you can claim a deduction for payments toward the interest on a home loan, but not on credit cards.
Another common form of refinancing, according to Colton, is opting to move out of a mortgage that is a 30-year fixed rate for shorter term loans, which offer rates as low as 2.28 percent. The adjustable rate mortgages are offered at five-year, seven-year and many other lengths from 10 to 20 years and are well suited for homeowners that know they'll outgrow, whether in terms of income or size of family, in that period of time.
Refinancing, however, is not the best option for all homeowners.
"There's a big misconception right now in that everybody thinks it's a great time to refinance," says Joe Ory, a REMAX Realtor and manager who's worked in the local real estate business for 17 years. "You need to look at your own portfolio and consult your Realtor or accountant before you make a decision.
"In your mortgage, all your interest is paid on the front end of the payments," Ory explains. "If you're far into loan, the payments you are making are reducing your principal. If that's the case, and you refinance, you start paying interest all over again. Say your note is $1,000 a month and you have five years left on your mortgage, and you refinance and your monthly note drops to $600. But, then, you might have 15 years left of payments. That's all paying more interest."
Ory also warns of the costs involved in refinancing, with a number of fees for filing, insurance and taxes all resulting for a new deal. However, Ory says that the low interest rates are creating a lot of new buyers in the market, and the increased demand and competition is beneficial for local real estate. "With rates this low, we now have a healthy amount of buyers," he says. "As long as that's the case, the market's going to be optimistic."
As a result, Ory says, we're experiencing "a true revitalization of New Orleans," a success he also attributes to Mayor Ray Nagin's leadership. "A lot of people are moving back to the city," he says. "That's a positive. But it's not just a local thing, this real estate boom is a nationwide phenomenon. The rates are that good."
As a result, local Realtors are busy all across the board, and the activity is having a dramatic effect on the city, many say.
"New Orleans is doing great right now," says Bryan Francher, a Realtor with Prudential Gardner that specializes in French Quarter, Garden District and Uptown properties. "Listings are going so quickly; nothing stays on the market for too long.
"The rates will never be this low again in our lifetime," Francher continues. "Real estate is the safest investment you can make right now, with the stock market moving up and down and so much."
The result, Francher says, is widespread renovations in areas such as the Irish Channel, often for first-time homebuyers, and sales of larger, grander homes in areas of Uptown and the Garden District. "We're seeing a lot of activity at every price level," Francher says. "People are buying million-dollar estates near Audubon Park, and they're also buying $100,000 shotguns in the Irish Channel."
Francher says that as a Realtor, he works with his clients to refer them to at least three different lenders, either mortgage companies or banks. From there, after the client receives a "good-faith estimate" and knows what price home they can afford based on the size of loan they can qualify for, the search begins.
"The low rates are affecting the market all around," says Gordon Maginnis, a Realtor with Keller Williams. "Not only increased sales, but it's also creating a lot of refinancing. That moves into the market in several ways. Not only are singles and primary-residence homes being sold, but investment and commercial properties are also moving fast."
Maginnis is seeing the housing boom transform the Bywater and Faubourg Marigny neighborhoods, with growth now moving into Bayou St. John, Mid-City and Treme. With so many buyers now entering the market, Maginnis recommends they consult a Realtor first and then determine what they can afford.
"People really need to shop around for a lender," Maginnis advises. "They should talk to a Realtor, who will in turn recommend a lender that will pre-qualify them for a loan. It's important they know going in what they can and can't afford. Some people have a good sense of what they can afford, some don't. They come out of that meeting with eyes wide open, realizing they can do some things they didn't think they could afford to."
"I don't think the rates can go any lower," Maginnis says. "People should take advantage of that because no one knows when or how they'll change. The time is now."