Home Buyers Are Caught in a Race With Rising Rates : Real estate: As loan costs climb, ownership will elude some who waited. Adjustable-rate mortgages can help.
When Todd and Marilyn Bentson started looking for their first home in Riverside County earlier this year, they figured they could comfortably afford a nice house in the range of $150,000.
With fixed mortgage rates under 7% and a down payment of nearly $30,000, their monthly payments would have been less than $800. But by the time the young couple narrowed their list of prospective purchases last month, rates had jumped to more than 8%, and the best loan they could find called for monthly payments of more than $900.
“We’ll probably still buy one of those houses,” Marilyn Bentson said, “but we’ll sure miss that extra $100 or $150 a month.”
Across Southern California, would-be home borrowers have been squeezed by the rise in mortgage rates that accelerated in February, when the Federal Reserve Board began raising interest rates to cool the economy.
Some borrowers, such as the Bentsons, are biting the bullet and buying anyway. Others, including many homeowners who want to refinance their current loans, are opting for adjustable-rate mortgages with low introductory payments.
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Meanwhile, some builders and real estate agents are blaming higher interest rates for a sudden drop in sales. Many local lenders have already begun laying off clerks and loan processors now that business has declined.
Although most analysts believe interest rates won’t rise too much more this year, some worry that any unexpected increases could snuff out the region’s recent housing rally. And while higher rates have so far knocked relatively few buyers out of the market, real estate agents say consumers are beginning to grow cautious.
“What was almost at a fever pitch has now converted to, ‘Maybe we’ll buy, maybe we won’t,’ ” Pasadena real estate agent Ricki Weinberger said.
Rates for 30-year, fixed-rate mortgages have shot up to 8.5% from about 7% when the Fed initiated the first of its three rate hikes this year.
The 1 1/2-point increase has added about $154 to the monthly cost of a new $150,000 mortgage, and it slammed the brakes on a long refinancing boom. Refinancings account for just 10% to 15% of lenders’ new loan business today, down from about 70% earlier in the year, according to the Mortgage Bankers Assn. of America.
“The rise in rates hasn’t dampened refinancing--it has (virtually) turned off the spigot,” said Warren V. Lasko, executive vice president of the trade group.
California’s largest mortgage banker, Pasadena-based Countrywide Funding, said Wednesday that it has trimmed more than 500 people from its loan production division--nearly 20% of the department--since its mortgage business peaked in December.
Prudential Insurance Co.’s home loan company, one of the nation’s largest, said earlier this week that it will lay off about 600 people, or 12% of its staff, by the end of May and that many of those cuts will be made in its huge loan-processing center in Costa Mesa.
Borrowers are having to make some major adjustments. Many who went ahead with refinancings have had to change their plans in midstream as rates have shot up.
When Rick and Cheryl Maholchic first started shopping for a loan to refinance their $275,000 Agoura home in February, they hoped to get a fixed-rate loan at about 7% to replace their adjustable-rate mortgage.
But by the time they had chosen a lender and filed their application, rates had jumped to 8%, making it less worthwhile to pursue a refinancing.
“The rates shot up the day we got the offer, so we had to take a step back and think of something else,” said Rick Maholchic, a 29-year-old insurance salesman.
They did a little more loan shopping and found a lender willing to make a “hybrid” mortgage that carries a 4% fixed rate for the first five years, converting to an adjustable-rate loan for the remaining 25 years.
“We’ve cut $800 off our monthly payments, and we’ll probably move before the rate has a chance to go up five years from now,” Maholchic said.
Some developers and real estate agents say the rate upswing has actually helped their business by pushing cautious home buyers off the sidelines and into the market before rates go even higher.
“I think that the worst of the rate hikes are over and that we’ll still have a strong spring home-buying season,” said Leslie Appleton-Young, an economist for the California Assn. of Realtors. But if rates continue upward, she said, “more people would get pushed out of the market and sales would take a hit.”
But others say prospective buyers of relatively modest means--the people one lender described as “the folks who really notice the difference between a $650-a-month payment and a $700 payment”--have seen their home-buying dreams put on hold by the rate hikes.
Upland-based Inco Homes caters to these buyers. One of the few Southern California developers which builds single-family homes for as little as $60,000, Inco said its orders for new homes at the end of March were half what they were a year earlier.
Inco’s stock price plunged 25% in value last Friday after the company said its first-quarter profit fell 60%.
“First-time buyers are always the first to feel the pain when interest rates go up, because they’re the ones who are living on the tightest budgets,” said Ira Norris, Inco’s chief executive. “For them, a one-point rise in rates can make the difference between being able to buy a home and not being able to buy.”
Buyers started coming back in April. “Maybe the shock has worn off,” Norris said. “Mortgage rates at 8% or 8.5% are still a great bargain, even if they’re higher than they were a few months ago.”
The rising rates have frustrated John Hartley, who recently went into escrow to buy a home in San Clemente.
When he sold his Coto de Caza home in south Orange County a month ago, he had hoped to buy a home near the beach with a fixed-rate loan.
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But “since we sold, it seems like interest rates have gone up two or three points,” he said. He was looking at fixed rates of 8.5% and adjustable rates pegged to fast-moving indexes, and at big loan fees.
Hartley, a civilian jet simulator technician for the El Toro Marine Corps Air Station, ended up with an adjustable-rate loan that starts at 5.65% and probably won’t go much above 6.1% in the first year.
But he’s paying a bit more to reduce the ceiling--the most he could possibly pay if rates went through the roof--to 9.95%. “Interest rates,” he says, “are like going to Vegas and throwing the dice.”
Times staff writer James S. Granelli in Orange County contributed to this report.
