Falling Bond Rate Could Signal an Easing of Credit : Economy: Continued bullish reaction to Clinton program may spur home buying, corporate borrowing.

Just when consumers and businesses thought that interest rates had fallen as low as they could go, they are falling again--and that could mean a surge in home buying, big reductions in home mortgage payments and easier access to credit for companies looking to expand.

On Monday, the nation’s bond market--a key barometer of long-term interest rates--kept the momentum going. The yield on 30-year Treasury bonds dropped to 6.93% from 7% Friday, marking the first time that the yield has fallen below 7% since the government began selling the securities in 1977.

The development is critical for President Clinton’s economic plan, which is betting that lower interest rates will dramatically soften the blow of higher taxes. Clinton has been traveling the country in recent days, touting an economic package to raise income and energy taxes, reduce the deficit, cut spending and stimulate the economy.

Investors are scrambling to buy the bonds now because they believe the Clinton economic program will mean a continuation of low inflation and lower interest rates, with the added benefit of less federal borrowing. Bond yields fall as more investors buy bonds and drive the price up.

Though many critics doubt Clinton can achieve his goals, the bond market so far is giving him a strong vote of confidence. Long-term rates have been falling since Clinton was elected to the White House in November, and they took a nose dive when news of his economic proposals began filtering out last week.

Low interest rates are a key reason Sharon Green, 33, and her husband, Alan Knoerr, 35, are in the market for a new house, their first.

“Interest rates are favorable right now and . . . prices have been coming down, so that’s certainly good,” said Green, a legislative analyst with the Los Angeles County Sanitation District.

Because borrowing costs on many kinds of long-term loans generally move in tandem with Treasury bond rates, consumers and businesses are likely to benefit from interest rates that many economists expect will remain low or fall further:

* Perhaps most important, long-term, fixed-rate mortgage rates are expected to continue falling, making homes even more affordable. By one measure, housing is already at its most affordable levels in nearly 20 years.

* Lower mortgage rates are making it easier for homeowners to refinance their existing mortgages, lowering debts and freeing up cash for other expenses. Refinancing occurred at a record pace in 1992, and 1993 is expected to outpace that.

* Falling rates could have the side benefit of encouraging banks to lend more money to business borrowers. Banks have huge investments in bonds, but as long-term rates fall, bankers will be more inclined to sell those bonds and use the money to make loans.

* Companies will be able to lower their fiscal burdens by refinancing long-term debt, freeing capital for new equipment purchases, expansion or new hiring.

The steep drop in long-term interest rates follows a long slide in short-term rates over the last two years. Short-term rates, such as the bank prime lending rate or yields paid on bank savings certificates, are basically controlled by the Federal Reserve. The Fed has cut those rates since 1990 in an effort to stimulate the economy.

But the Fed cannot control longer-term interest rates. Those yields are determined by the market--and the market’s message in the last few days is that it believes Clinton’s program will keep long-term interest rates down.

Green and Knoerr, an Occidental College math professor, have been looking for a house not too far from their current $850-a-month apartment in Eagle Rock, focusing on Pasadena and environs.

With a combined income of about $86,500 and $40,000 for a down payment, they figure they can afford a house in the $230,000 to $270,000 range.

Yet, uncertainty about the economy may still delay their decision. “We’re relatively new on our jobs,” Green said. “ . . . We feel that generally, you can’t assume security, even though we haven’t ever had any problems with that. You just never know.”

If they go ahead, they and thousands of others like them will provide a key impetus to economic recovery. Buying a house sets in motion a host of other economic activity: It benefits realtors, mortgage lenders, construction companies, furniture makers and purveyors of everything from toasters to stereos.

By one estimate, a dollar spent on a house generates $2.50 throughout the rest of the economy.

Lower interest rates have already spurred a flurry of home buying. In California, December sales of existing homes were up 14% over a year ago, according to the California Assn. of Realtors.

Home buying is only part of the picture. Homeowners have rushed to take advantage of lower rates by refinancing.

Mortgage refinancings boomed twice last year, in January and in July. A new boom is surging now, with the possibility of eclipsing both earlier ones, said David Lereah, chief economist at the Mortgage Bankers Assn. in Washington.

Ricki Weinberger, the real estate agent for Green and Knoerr, has jumped on the refinancing train herself. She and her housemate, UCLA professor Alan Willson, bought their spacious $500,000 home in 1989 with an adjustable rate mortgage that started at 9.5%.

As rates fell last year, they refinanced to a mortgage that started with an 8.25% rate for five years, then bumped up one time for the rest of the 30-year term.

“Now, 30-year fixed loans that have no fancy quirks to them are at 8% or under, and we’re actually thinking of expending the money to do it again,” Weinberger said. “The biggest problem is that the title costs every time you go to refinance are enormous. . . . Last time, it cost us $1,200.”

Still, it can be worth it. Just in terms of cash flow, refinancing the first time freed about $700 a month. That kind of money can find its way into the economy in other ways--something that Clinton and his planners hope will stimulate growth.

“It made things a lot less tight,” Weinberger said. “Now, we can afford to think about buying down the mortgage so that we’ll pay even less . . . (and) we did buy some new electronic goods.”

Lereah estimates that the refinancings in 1992 meant that homeowners lowered their debts by roughly $7 billion or $8 billion. That could mean a lot of new refrigerators--or merely extra cash to pay all those new taxes.

In any case, homeowners aren’t the only ones who can benefit from refinancing.

Corporations, many of whom have borrowed long-term money in the form of corporate bond obligations, are now in a position of lowering their interest burdens.

Los Angeles-based oil company Unocal Corp. still has $3.7 billion in total debt, reduced from $6.1 billion borrowed to fend off corporate raider T. Boone Pickens in 1985.

In particular, about $650 million of that debt is in the form of 8.5% to 9.75% bonds in the hands mainly of large institutional investors--bonds that mature in the next 14 months or so.

“We have no imminent plans for refinancing, but over a 12- or 15-month period, if rates stay down or go lower, we would become active,” said Unocal spokesman Michael Thacher.

Unocal would use any savings to develop new U.S. oil and gas reserves, which would boost the company’s profitability and create jobs.

Banks are now one of the largest buyers of Treasury bonds, which they regard as safe investments. Spooked by bad loans of the 1980s, many banks opted to put more money into these safe bets as long as they could earn a nice return.

But as the yield drops, banks could sell the bonds and “become more aggressive lenders,” said James Donnelly, chief technical analyst with Technical Data, a division of Thomson Financial Networks, in Boston.

Times staff writer Tom Petruno contributed to this story.