THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Wednesday, November 16, 1994 TAG: 9411160442
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: By MYLENE MANGALINDAN, STAFF WRITER
LENGTH: Medium: 90 lines
The Federal Reserve's one-size-fits-all solution to curbing inflation may benefit the nation, but it could push Hampton Roads' sluggish economy into a serious decline.
Fearing the specter of an overheating economy, the Fed raised interest rates on Tuesday for the sixth time this year by 3/4 percent, the largest single increase in more than a decade.
While Wall Street and regional economists applauded the move, local business people and academics dismissed it as a major blow to the region.
``For the nation, fine, but it's not a policy we need here,'' said Roy Pearson, a professor at the College of William and Mary.
While the Fed's actions probably won't cause a recession in Hampton Roads, economists say, it will crimp the region's economic expansion. Growing at about a 2 percent rate, a moderate pace but not brisk, Hampton Roads is playing catch-up behind the nation's 3.4 percent rate of growth.
``Given the fact that we're lagging behind because of defense cuts, we're going to be even more sensitive to it,'' said David Garraty, an economist at Virginia Wesleyan College, of the higher interest rates.
Concern from various sectors of business echoed in Hampton Roads, where consumers, sales people and developers enumerated the adverse effects of the Fed's action.
``We'll sell fewer homes, fewer cars, less retail goods. That will have an impact all across the region,'' said John W. Whaley, an economist at the Hampton Roads Planning District Commission.
Consumers usually hesitate to buy big-ticket items in the face of higher costs. Whaley said local retail and auto sales have already been slowing down in recent months.
``This is just going to compound that emerging weakness,'' he said.
Construction companies and real estate developers worried that the rate hike could dry up the financing for their future projects.
``Certainly we've seen some inflation in the construction market because the market has improved,'' said Tom Shelton, chief financial officer for Newport News-based W.M. Jordan Co. Inc., a construction company. New building in the region has driven the increase in local employment and economic growth over the last few months.
``With prices increasing you're going to see some deterioration in the market as a result,'' Shelton said. ``It's not going to plummet overnight but it's certainly going to weaken it.''
Cecil Cutchins, president of Olympia Development Co., a Virginia Beach based real estate developer, sounded more pessimistic: ``Office commercial development is improving but not booming. This will put the skids back down.''
Commercial real estate had reached a point where the cost of building a new office was close to the cost of rental rates in existing buildings, said Deborah Stearns, a senior vice president at Goodman Segar Hogan Hoffler. Although the price of loans is still reasonable viewed over a 10-year period - when floating construction loans reached 19 percent - the higher rates could push the cost of new development out of reach, she said.
With a local economy so dependent upon construction, Hampton Roads will be more drastically affected by the higher rates than other less active markets, said Wayne Brown, vice president at Alexander Builders Inc. in Norfolk.
Home buyers have already been spooked.
Many Hampton Roads residents locked in their mortgage rates to head off the threat of another hefty increase by the Fed, said Louis Tourgee, division vice president of CTX Mortgage Co. in Virginia Beach. Misconceptions of how interest rates work may be driving those decisions.
Adjustable rate mortgages and short-term home equity loans will likely spike because of the Fed's action. But rates for 15- to 30-year mortgages could hold steady or decline, economists say.
Long-term rates are driven by expectations of inflation. If the economy is sluggish or in decline, rates usually drop. If it is perceived as growing too quickly, rates trend upward, which has been the case in recent months.
``Now that interest rates (for fixed, 30-year conventional mortgage loans) are in the 9 percent range, it's going to further heighten the concern people have that housing is not affordable,'' Tourgee said of the Fed's move.
On a positive note, because of all the interest rate fluctuation, adjustable rate mortgages have flooded the market, giving home buyers more variety to choose from. But those changes can hardly compensate for the drawbacks.
``We haven't exactly been out of the real estate recession for a protracted period of time,'' Tourgee said. Fewer people may decide to buy homes but rather, stay in their present home or apartment, he said.
``What typically happens is that if it doesn't have a direct result, it has a mental effect,'' said Linda Bass, new home sales manager for William E. Wood & Associates. MEMO: Staff writer Dave Mayfield contributed to this report.
by CNB