Transcript: 1-2 Punch to Housing Market?

This is a partial transcript from "Your World with Neil Cavuto," March 21, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: Well, 30-year mortgages hit their highest level in seven months and interest rates are headed north again Tuesday — most likely. So is the one-two punch enough to stifle the already hot housing market?

Barbara Corcoran says absolutely not. Barbara is the founder and the chairwoman of the Corcoran Group, among their most esteemed realtors on the planet.

Good to have you.


CAVUTO: So play it for me. What happens if we get up another quarter point? What do people do?

CORCORAN: Pretty much the same thing that's happened the last few hikes which have been minimal, less than a quarter of a point, in fact. People are not going to have a big reaction to it. The real enemy, if there was an enemy, is really how high pricing is going up on the houses. They've gone up 10.5 percent in the last year alone.

CAVUTO: All right. I think David Wyss is with us right now of Standard & Poor's. David, do you agree with that?

DAVID WYSS, STANDARD & POOR'S: Not completely. Mortgage rates matter. For most people what counts is the monthly payment they've got to make. And at six percent that's higher than it was at five percent, especially after that home price appreciation that Barbara talked about.

CAVUTO: So Barbara, in other words, these things ad up.


CAVUTO: You know, let's say they keep going a quarter point every six weeks when they meet. It's going to start being serious change.

CORCORAN: I think the most important thing is the timing of it all. If they go up a quarter point, an eighth point, a quarter point, it's great, because people have a chance to absorb it. I always think the psychological damage that's done by people fearing interest rate hikes plays havoc on the housing market.

CAVUTO: But I don't think people know that, at least by my reckoning, the Fed is going to keep doing this every single meeting all this year.

CORCORAN: And you're saying once more that you think people don't know that?

CAVUTO: I think a lot of them don't. When I talk to a lot of folks, they assume that maybe one or two more hikes and that's it. I think we're going to get interest rates on the short-term, not that they're justified, double where they are now.

CORCORAN: Oh, double? My God, that's so extreme. I think most people...

CAVUTO: That would be an equilibrium. That would be just where they should be historically.

CORCORAN: Well, not really. I don't think anybody is expecting them to go up, like, four or five percent over the next year and a half. I think people are predicting maybe a point, a point and a half in the next two years.

CAVUTO: And that's the end of it? That's all you see? David, do you agree with that?

WYSS: No, actually, I'm closer to Barbara on this. I think we'll probably end up around a seven percent mortgage rate, which is about average by historical standards.

CAVUTO: All right. We must stress, that's something over which the Fed has no direct control. So you're saying that the bond market kind of sees this as a vigilant fight against inflation, keeps rates relatively low. So for most borrowers in the fixed arena, things stay the same?

WYSS: Yes, I mean, I think the Fed is going to go to around four percent, 4 1/2 percent and 10-year bonds to 5 1/2. That suggests about a seven percent mortgage rate.

CAVUTO: What if it gets to be eight percent? Is there at which, you know, your smart crowd begins saying that's a pinch?

CORCORAN: You know, I think people are frightened by double digit. When you see a double-digit number, people think we're out of control. That worries me. But up until then, as long as it's a little at a time, I'm not worried about it. And I am a worrier by nature.

CAVUTO: Yes, you are.

David, we are a nation of gradualists, though, so we can't envision what happens with the pile-on effect of these rate hikes. What is it it's not a gradual seven percent move? What if, in the end, the market starts fearing that the dollar is out of control, swooning down, our deficits are out of control, and playing devil's advocates hire, that our interest rates go out of control?

WYSS: Then the same thing happens that happened back in the early '80s, and you see the housing be cut in half. A million housing starts instead of two million housing starts, and home prices flat to down for a few years.

CAVUTO: But you don't see that happening?

WYSS: I don't think that's going to happen, because the inflation isn't happening. And frankly, the puzzle is that interest rates haven't gone up more, at least in the long term.

CAVUTO: That's a good point. Barbara, let me ask you about what's been happening now. Is, in the housing sector, the fact we haven't seen the proverbial bubble burst, is it simply because of supply and demand? Can you still have markets like we see in the northeast and in much of the west going at a 20, 30, 35 percent clip? We can't have that forever, right?

CORCORAN: We can't have that forever. But it's not as simple as cheap money around that's supporting this market. Another big card out there is people feel comfortable with real estate. And the level of mistrust for everything else in life is so grand right now, for government, for business, for everything. People don't trust the world anymore. It's a scarier place and...

CAVUTO: Do they trust realtors more?

CORCORAN: Not realtors but it's like children, when they're frightened, where do they run? They run home. And that's exactly what's happened in the real estate market right now.

CAVUTO: Do you find it healthy, though, Barbara, that people are taking on home equity loans as a deposit on a second home or leveraging off the real estate they have now and putting it up to the hock to get something?

CORCORAN: Well, putting it up to the hock is an extreme example, and I think there's probably 10 percent of the people out there out that oughtn't be doing it.

But put yourself in the position of someone who's thinking prices are going through the roof. They're only going to get higher. And that's what explains people going out early to buy retirement homes, because they think they want to get in there before prices go through the roof.

So I say it makes great sense for the majority of people. And then there's always the wild 10 percent that have no business being there.

CAVUTO: David?

WYSS: Well, people aren't going out early to buy retirement homes. If you look historically, retirement homes are bought when people are in their 50s, and that's what's happening now.

CAVUTO: Yes. And there are more in their 50s, I guess, right?

WYSS: Well, all those Baby Boomers are getting to that prime age group. And plus, you're seeing the Europeans come over here. One difference in the early '80s, the dollar is weak instead of strong.

CAVUTO: Good point.

WYSS: Boy, I look down in Florida and I see all those Germans buying up all those condos.

CORCORAN: You don't look old enough to be in Florida yet.

CAVUTO: See that?

WYSS: My parents are.

CAVUTO: On a related subject, KB Homes is just out with earnings that are 65 percent. So maybe something to what you're saying.

All right. David and Barbara, thank you very much. We're going to be talking to that company's CEO tomorrow about all of this.

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