THE MIDEAST CRISIS: ASSESSING THE DAMAGE : Interest Rates : Fixed Home Loans Rise on Inflation Fears

Middle East tensions and inflation fears helped boost rates on fixed-rate mortgages in California by more than a quarter of a percentage point in the past week but left largely untouched the rates for more common adjustable-rate home loans, lenders and economists said Tuesday.

Another 0.25-point increase for fixed-rate, 30-year loans--now ranging from 10.25% to 10.50% in California--is possible this month as inflation worries persist, economists and lenders said.

But few see mortgage rates soaring much beyond that level. Rates are still under strong downward pressure, they say, because of the slowing economy and slack demand for housing.

“Generally, economic pressures suggest a downward trend. The concern in my mind is what factor inflation would play should there be a long-term ratcheting in oil prices,” said Chris Taylor, manager of economics and market analysis for the California Assn. of Realtors.

As examples of the rate hikes, Beverly Hills-based Great Western Bank this week raised its fixed rate to 10.4% from 10.1%, while Stockton-based American Savings Bank went to 10.25% from 10%.

The impact of such increases in California is blunted by the fact that most home loans made here are adjustable, meaning their rates rise and fall with other interest rates. In addition, despite the increases this week, fixed rates are still well below what they were three months ago, when they approached 11% at some institutions.

Still, any increase in fixed rates is bad news for home sales, which have slowed substantially this year.

Because of the softer market, the California Assn. of Realtors on Tuesday sharply revised its forecast for home price appreciation in the state this year.

The association said it expects the median price of a single-family house to rise only 1.5% this year to $198,500, instead of the 9% increase it originally forecast. The association expects the median price of a condominium to rise 6% to $146,600, instead of the 12% increase forecast initially. The group said it still expects house sales to drop 11% but revised its projection on condos to show a 5% decline in sales instead of the 10% increase it originally projected.

Rates for 30-year fixed mortgages have increased primarily because of fears about inflation caused by the prospect of another oil price shock. Lenders are reluctant to make long-term loans when they see inflation rising because they have difficulty selling those loans to investors.

Some believe rates might have climbed anyway. Scott A. McAfee, managing director of the residential real estate group at Los Angeles-based Security Pacific National Bank, said rates jumped the day before Iraq invaded Kuwait. He attributed the hike to skepticism that the Federal Reserve Board would take major action soon to lower rates.

In setting fixed-rate loans, lenders tend to watch the market for seven-year Treasury notes and 10-year Treasury bonds, which have taken a drubbing the past few days, pushing up their yields. Those securities are considered key indicators because lenders believe their maturities correspond to how long people hold their mortgages before they sell their homes and pay off the loans.

For a consumer, the increased rate means this: On a $200,000, 30-year fixed-rate loan, a hike to 10.25% from 10% translates into a $37-a-month increase in the monthly payment, to a total of $1,792. Another quarter-point increase to 10.5% would result in payments of $1,829 a month.

One effect of the increase in fixed-rate mortgages is that it makes adjustable-rate loans more attractive. That is what many lenders prefer anyway, because those loans better protect them from rising interest rates.

Various lenders and real estate sources estimate that one-half to three-quarters of all home loans in California are adjustable. Officials at American Savings and Great Western, two of the state’s largest mortgage lenders, said Tuesday that adjustables make up more than 90% of their business.

In setting rates for adjustable loans, lenders generally look at what they are paying depositors and other sources for money--an indicator that rises more slowly than market interest rates. Initial “teaser” rates for adjustable-rate mortgages tend to be two percentage points below fixed-rate loans, a spread that is widening as rates on fixed-rate mortgages rise.