Economic impact of rate hike would spread across sector.

SWEEPING changes are in store as the era of bargain-basement interest rates comes to an end.

Many economists now expect rates to start rising as early as this summer amid signs of job growth and inflation. Interest rates affect myriad real estate-related industries here, including housing, mortgage lending and the buying and selling of commercial properties.

For three years, low rates have been a boon to those industries. They have swelled their payrolls and made executives rich. The housing market itself encompasses countless companies from homebuilders, realtors and construction companies to furniture makers, the and carpet manufacturers.

Conventional wisdom on interest rates has changed in the past few weeks as mounting data show the U.S. economy is heating up. The first big news hit when the Labor Department said the nation added 308,000 jobs in March, versus a year earlier. Economists expected 123,000 new jobs.

Such data could put the squeeze on the Federal Reserve Bank to raise its market-moving federal funds rate this year from its current 1 percent. Still, the region is far from doomed, since a rise in interest rates should accompany a stronger economy, said Esmael Adibi, director of Chapman University's A. Gary Anderson Center for Economic Research.

Economists, real estate analysts, and homebuilders interviewed said higher rates should cool the local housing market, where in Orange County the median price reached a record $485,000 in March, up 23 percent from a year earlier, according to San Diego-based market tracker DataQuick Information Systems.

While not predicting a decline in prices, they said the years of double-digit gains are over. "Our market is strong and so supply-constrained, we are not in any kind of a bubble," said Michelle Wolkoys, managing director of Costa Mesa-based The Meyers Group, which tracks new-home sales.

But the fate of the housing market next year and beyond is unclear, according to Adibi. He said much depends on how much and how quickly rates rise.

Other industries will likely be impacted by rising rates.

Mortgage companies benefited from the craze in home loan refinancing that peaked last summer when mortgage rates hit rock bottom. But in the face of falling demand, several mortgage companies, as well as title companies, already have cut staff.

Low interest rates also have influenced much of the activity in commercial real estate. Low rates helped landlords hold on to their properties despite a decline in occupancy after the leasing market tanked in 2001, brokers said.

Although many landlords were left with big blocks of empty space, especially in high-rise office buildings, they refinanced debt and lowered their mortgages in much the same way homeowners have done.

End of Decline

Mortage rates could rise again

Jan. 1, 2000      7.8%
April 23, 2004    5.69%

Note: Table made from line graph.

Source: Bankrate.com

--Orange County Business Journal