Decline in Fixed-Rate Mortgages Expected Soon : Real estate: Rates have risen a percentage point since Christmas to their current high of 11%. They may drop to 10.25% by year-end.
Interest rates on fixed-rate home mortgages should soon end their recent steep climb and settle back well below 11% in the months ahead, real estate and housing economists believe.
Fixed-rate home loans--by far the most popular loan with consumers because they provide for level payments every month--have risen about a full percentage point since Christmas and are now approaching or have even surpassed 11%, their highest level in nearly a year. That has been bad news for prospective home buyers and homeowners with adjustable-rate mortgages.
Many economists believe, though, that these mortgage rates will rise another quarter of a percentage point at most before settling back below 11% and will end the year between 10.25% and 10.75%.
At the same time, housing economists are closely watching how investors--those from Japan in particular--will react to this week’s expected sale of $30.5 billion in U.S. Treasury securities.
The interest rates on those bonds have a direct impact on the rates that American consumers pay on their mortgages and illustrates the profound impact that Japanese investors have on U.S. homeowners.
The mortgage-rate increases of the past five months have hurt the U.S. housing market, cutting into new-home sales nationwide and retarding the pace of housing resales in California. The increases also make it harder for borrowers to qualify for home loans.
Monthly principal and interest payments on a $175,000 loan total $1,666 when the interest rate is 11% versus $1,536 when it’s 10%, according to figures from the California Assn. of Realtors. The median price of a resale house in California is now more than $196,000.
A jump in mortgage rates from 10% to 11% also squeezes another 135,000 renters out of the housing market statewide, a spokeswoman for CAR estimated, adding that California has about 4.7 million renters.
Rising mortgage rates are a key reason why housing sales in California are suffering this year, economists say. According to data released Monday by the California Assn. of Realtors, the pace of first-quarter sales of existing single-family homes ran at more than 13% below the torrid level in the first three months of 1989, although it was up 2.9% on an annualized basis from the fourth quarter of 1989. The realtors group said it expects that housing resales will drop 11% for all of 1990.
The sales of single-family homes nationwide have been falling for months, according to Commerce Department figures. The annual pace of new-home sales fell to 574,000 in March, below 1989 levels when sales were at their weakest pace in years.
“This is a recession year for real estate . . . and that includes California,” said Sanford Goodkin, a real estate consultant in San Diego for KPMG Peat Marwick.
The news is also bad for consumers with adjustable-rate mortgages whose monthly payments vary according to a volatile index based on one-year Treasury notes. The more the index rises, the more their monthly home-loan payments rise.
One large savings and loan based in Los Angeles, California Federal Bank, has about 35,000 borrowers and $2.73 billion in home loans tied to the one-year Treasury index, which rose from 7.72% in December to 8.35% in March. The April figure is due out today and “it should be a lot higher,” a bank spokeswoman said.
Long-term fixed-rate mortgages typically are 1.5 to 2 percentage points higher than rates on long-term U.S. Treasury securities, economists say.
That’s because most fixed-rate home loans today are sold by lenders to quasi-government agencies such as the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Assn. (Fannie Mae). These agencies, in turn, package the loans as securities and sell them to investors, who usually buy them at a premium above long-term Treasury rates.
Thus, the bond market in Treasury securities, which is affected by national trends in employment and inflation, has become the major force behind fixed-rate mortgages. That explains why the rise in mortgage rates in the past five months “is really a bond market story,” noted Mike Penzer, senior economist at the Bank of America.
The nation’s bond market was jolted last month when consumer prices rose much faster than expected. The news drove down bond prices and was a major reason why mortgage rates jumped about a half percentage point in April. Interest rates rise when bond prices fall.
On the other hand, bond prices rose and interest rates fell last Friday on the news that unemployment rates were up, possibly indicating that the economy was not as strong as many experts had thought. A strong economy fuels investor fears that inflation will get worse and cut into profits on their fixed-income securities.
Investors are now concerned about what role the Japanese will play in this week’s Treasury-bond sale. Japanese investors traditionally have been big buyers of U.S. government securities, but recent financial turmoil in the Tokyo stock market have raised questions about how active they will be in this week’s bond auction.
