Tulsa Real Estate's Hidden Asset

Every few months, after the last predictions of a real estate bubble have passed, it's always useful to consider the latest forecasts of disaster.

"After an amazing four-year boom in residential real estate," says Business Week, "the housing market could finally be topping out and heading for a downturn. The culprit: rising interest rates. Housing prices could then flatten on a national level in the next year or so while taking a spill in overheated coastal markets." (Is The Housing Bubble About To Burst? July 19, 2004)

Such articles make a useful point: Tulsa real estate values, like stock market prices, can rise and fall.

Yet the art of forecasting seems awfully difficult: How many stock analysts foresaw the Wall Street crash, the Internet bubble or the fall of so many stocks that once flew so high? Where were the Wall Street advisers telling investors to take their money out of the stock market? I don't recall too many of those.

Now we find that incomes nationwide actually fell in 2001 and 2002, according to the IRS. Most of the losses were in the form of capital gains, not a big surprise given the Wall Street crash and the loss of value worth trillions of dollars.

At this moment we have economic conditions which seem without parallel. There is a massive federal deficit -- but minimal inflation and remarkably-low interest rates. We have woeful balance-of-payments -- but other countries continue to accept our cash. And home prices keep rising -- even as bankruptcy claims set new records.

In the past few years the general feeling has been that people bought homes because interest rates were collapsing while home prices were rising. The ability to buy an appreciating asset at less and less cost is surely attractive and no doubt accounts in part for the massive number of real estate sales seen in recent years.

As well, if you can acquire an asset that is appreciating in value, it makes sense to buy as much asset as possible -- thus a reason to purchase huge houses.

We now face rising interest rates which in a logical world would suggest the coming onset of the "fab four" economic results: Higher monthly payment costs, fewer sales, less demand and lower prices. There is also the reality that home prices cannot rise eternally, at some point there must be a leveling off or even a decline.

However, hidden away in this tidal wave of bad economic news is a wonderful curiosity: All that financing and refinancing at lower and lower rates represents good fortune, especially for those who have gotten off the consumption merry-go-round and not maximized debt.

If you bought your Tulsa home five years ago the overwhelming probability is that despite rising property taxes, ownership costs have declined. Simply by refinancing existing debt and not cashing out or adding to loan balances, a savvy homeowner could reduce annual costs by thousands of dollars.

Imagine that someone bought a home at the end of 1999 for $250,000 with a $225,000 mortgage. Interest rates at the time were about 8 percent so the monthly cost for principal and interest over 30 years would be $1,651. Refinance the same amount at 5.5 percent, an obtainable rate in the past year, and the monthly cost would drop to $1,278 -- a savings of nearly $4,500 a year.

The new rate is roughly equal to three months of free mortgage financing per year when compared with the original loan cost. No less important, we don't tax "savings." That $4,500 is really an after-tax amount, not pre-tax.

If it's true that a Tulsa real estate decline must occur at some point, the decline need not be deep, painful or lengthy. In fact, one could argue that a short-term drop in prices might actually be good for sales as purchasers enter the market with the thought that it's best to buy now rather than in the future when prices might again start rising.

One could also make this argument: If rates rise there will be fewer buyers in the marketplace. There will also be fewer sellers because many owners will not want to give up the rates obtained in the past few years. The result will be a reduced number of homes for sale.

Balance fewer sellers (supply) with fewer buyers (demand) and we may not see much after-inflation price change as interest rates rise. What we are more likely to see are fewer unit sales -- a concern for Tulsa brokers and lenders now accustomed to real estate as a volume business.

Tulsa growth market No. 2 in the nation