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Economic 'sweet spot' will surely shift, experts say.

Byline: Chuck Slothower

Interest rates for standard 30-year mortgages will rise to about 5.5 percent by the end of 2019, a pair of economist said Wednesday. That should come amid an increase in inventory of homes on the market, the economists said.

Windermere Real Estate hosted the economics talk for brokers at the Sentinel hotel in downtown Portland. The panelists Matthew Gardner, chief economist for Windermere in Seattle, and Tom Potiowsky, director of the Northwest Economic Research Center at Portland State University said the economy is at an ideal point.

The U.S. economy is in a "Goldilocks zone," with growth neither too hot, nor too cold, Gardner said.

Potiowsky agreed.

"If there is such a thing as a sweet spot for an economic business cycle, we're in it," he said. "Unfortunately, sweet spots don't stay where they are."

The U.S. economy is in its 98th month of expansion. If that continues, by July 2019, it will exceed the 1990s boom for the longest in American history.

Economic expansions "don't die of old age," Potiowsky said. "There's got to be some bad behavior going on, like tariff wars."

There are no signs of a housing bubble or financial bubble that could pop, the economists said. But both pointed to President Donald Trump's trade disputes as a potential red flag.

"No one wins a trade war," Gardner said. "We're in a staring contest with Asia. We're not going to win."

Rising aluminum prices are a concern in the Seattle area, where Boeing manufactures airplanes. Lumber tariffs could affect housing, he said.

Economists are closely watching returns on two-year and 10-year Treasury bonds, a measure known as the yield curve. When longer-term yields fall below short-term yields, economists call that phenomenon an inverted yield curve. It's regarded as a reliable predictor of recessions, and rates have lately grown close to inverting.

The U.S. economy is in the "eighth inning" of the current expansion cycle, Gardner said, but any following downturn likely won't be deep or prolonged.

"It's not going to be another Great Recession," he said. "At least I don't see it."

For the local housing market, the days of extreme price increases appear to be over, Potiowsky said. Portland has fallen to the middle of the pack for home price increases in the 20-city Case-Shiller index.

"The affordability issue is starting to hit here," he said. "People are not coming in at 10 or 20 percent above asking prices."

First-time homebuyers are weighed down by student debt, which at $1.5 trillion now exceeds credit-card debt among consumers, Gardner said.

There could be a "psychological barrier" among prospective buyers when mortgage rates exceed 5 percent at some point in 2019, Gardner warned. While still relatively low by historical standards, higher rates could lead buyers to seek lower prices.

Rising mortgage rates could also convince more homeowners to stay put, Gardner predicted. Homeowners could be faced with leaving a mortgage with an interest rate below 4 percent for one above 5 percent.

"People might not be selling as often, because they don't want to lose their mortgage," he said.

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Publication:Daily Journal of Commerce (Portland, OR)
Date:Oct 4, 2018
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