John M. Lee: Checking the State of Real Estate

Today's gasoline prices are an albatross hanging around the neck of an economy that is trying to heat up.

Recent economic indicators reflect the damage being done by high fuel costs, and the damage shows up, of course, in the cost of doing nearly any kind of business. Some economists no longer believe that gasoline prices will settle back down to $40 a barrel or less and are warning that we may be facing a "permanent oil shock" as our economy struggles with this added expense. It is as if a new tax has been levied that does not even provide the benefit of additional revenues to reduce our government's deficits.

The likely result will be higher prices, and not just for gasoline. A higher inflation rate is reasonably likely to elevate interest rates further and that, economists agree, will slow the real estate market. There are a few problems with this scenario, though.

First, we are accustomed to interest rates rising when inflation rises, but it is usually when the economy is heating up a little more quickly than we want it to and wage pressures are starting to rise. This time, inflation is being caused by other problems - not overheating. But because these problems have the potential for slowing our economy, the Federal Reserve Board tends to lower interest rates.

So, what do we do? Raise rates because of rising inflation or lower rates because of apparent dangers to the economic recovery? There is no easy answer, though the greater likelihood is that the feds will continue to raise Federal Reserve Bank interest rates by a quarter of a percent at each meeting of the bank's Federal Open Market Committee.

Thus far, uncertainty in the markets has had a tendency to take back most of the upward advances long-term interest rates have made. The average interest rate on recently-written, conventional 30-year-fixed-rate loans has remained slightly below six percent in recent weeks.

Federal Reserve Bank Chairman Alan Greenspan continues to remark on how confusing it is that long-term rates remain so low. But the refusal of the markets to push interest rates much higher is surely the result of economic uncertainty, which Greenspan doesn't want to deepen by talking about it.

What is crystal clear, however, is demand for residential real estate remains extremely high. My listings all year have been selling with multiple offers and higher-than-asking prices. There is clearly an insatiable appetite for real estate in San Francisco.

One of the oddities of this enduring real estate boom is the obvious resistance to it among analysts in the financial media. For years, we have been warned that we are witnessing a real estate bubble about to burst. It has not, because people are taking advantage of extremely attractive financing opportunities, more types of mortgage loan programs than have ever been available and more streamlined transaction procedures to facilitate real estate purchases.

If real estate is increasing in value and interest rates are low, why would people stop buying? They would stop buying if they could no longer complete the transaction to purchase the home that meets their needs. That could be the result of a huge spike in interest rates, an over-abundance of available properties for sale or a major slowdown in the nation's economy, including further job layoffs.

If any of these factors show up on the horizon, then, and perhaps only then, will we start talking about bursting bubbles. In the meantime, it appears that this real estate market will remain far stronger than most analysts have predicted.

John M. Lee is a top-selling broker at Pacific Union specializing in the Richmond and Sunset districts. If you have any questions about real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.