SOME DARK CLOUDS ON THE HORIZON, AND SOME 'MAYBES'.

Byline: GREGORY J. WILCOX

Some bad mojo may be converging on the real estate market horizon.

Consider what rode in on the economic wind last week.

--The President's Advisory Panel on Federal Tax Reform, which is cooking up a plan to uncomplicate the complicated tax code, said it would consider restricting the mortgage interest deduction.

--Then interest rates rose above 6 percent for the first time since March and some economists think they will stay there for a while.

--Finally, consumers prices jumped by their biggest margin in a quarter century during September, reflecting the shock of high oil prices and the powerful hurricanes that decimated the Gulf Coast. At the same time, consumer confidence and industrial production plunged.

Pile all this on top of what some economists say is the recession on the way, and you get a big dark cloud.

Maybe.

At least individually they are troubling.

Maybe.

The mortgage deduction generates the most political passion, and convoluted reasoning.

The panel's thinking is that the current tax breaks for homeowners, like the interest deduction, encourage wealthier taxpayers to buy bigger houses and do little to help others purchase homes. Get rid of the deduction and prices will fall, putting the American Dream within reach of more buyers, or something like that.

On Friday afternoon, the fax machine spit out a release from the California Mortgage Bankers Association headlined: ``Cutting Mortgage Interest Deduction Would Destroy Homeownership in California.''

``That's one I think everyone in America is concerned about,'' said Jim Hamilton, president of the California Association of Realtors, said of the panel's proposal. ``It flies in the face of the president's promise to create more homeownership.''

Prices rising faster than incomes and tight supplies are the biggest impediment to buying a house, especially the first one.

And that interest rate deduction is a seductive carrot for just about every buyer.

Congressman Brad Sherman, D-Sherman Oaks, is no fan of the panel's proposal, noting that the deduction helps drive of the San Fernando Valley's economy by encouraging homeownership. The median price house in the Valley now costs more than half a million bucks, but that doesn't mean homeowners here are wealthy, the congressman said.

He also noted that President Bush started his second term wanting to privatize Social Security and reform the tax code.

Opposition to the former pretty much left it for dead.

``This idea will be as dead as the idea of privatizing Social Security,'' Sherman said of the mortgage interest deduction reform.

But interest rates are heading up. And there is no doubt that each uptick shrinks the pool of potential buyers. In its latest survey, Freddie Mac found the rate on a 30-year loan averaged 6.03 percent for the week ending Oct. 13, up from 5.74 percent a year ago. For the week of March 31, it averaged 6.04 percent.

The employment picture is better than anticipated, though, suggesting that economic growth will accelerate next year. Coupled with higher oil prices it adds up to higher mortgage rates in the months ahead, said Frank Nothaft, Freddie Mac's chief economist.

``Still, although mortgage rates have been rising for the last several weeks, they still remain historically very affordable and home sales this year will most certainly be at record high levels,'' he said.

Interest rates in the 6 percent range could slow home sales, but the market is not likely to tank.

That leaves inflation as the Big Unknown.

It's probably also the biggest threat of the three and something that is hard to control, said Keith T. Gumbinger, vice president of HSH Associates, the nation's biggest tracker of interest rate information.

Rising inflation would be bad news for anyone trying to buy a home.

``If inflation gets a significant toe hold, interest rates will rise much higher and much longer that most market players currently estimate,'' Gumbinger said.

Of course, one week or one month does not made a trend. But, in matters of the economy, all trends, good or bad, can be traced back to the month they started.

The real estate trend has been good for months on end.

And all good trends do come to an end.

Gregory J. Wilcox, [phone]

greg.wilcox(at)dailynews.com