Fed’s Repeated Rate Boosts Hitting Home in California

John Bates and his wife were delighted when they bought their Whittier house several months ago with an adjustable-rate mortgage. Its rate the first year was a low 5.25%.

Then came the Federal Reserve Board’s repeated interest rate hikes, which sent mortgage rates and other lending costs sharply higher. The latest action was Wednesday, when the Fed raised rates for the seventh time in 12 months.

So when the Bateses’ mortgage note turns a year old in May, it’s a good bet that the lender will raise the rate by the maximum two percentage points allowed under the loan, to 7.25%. Bates figures the change will cost him an extra $250 to $300 a month.

“We haven’t felt the squeeze yet, but we know it’s coming,” he said.

Indeed it is. And the Fed’s rate hikes are causing financial pain not only for homeowners with adjustable-rate mortgages. They are also slowing sales in the California housing market, which only recently began pulling out of a prolonged slump.

When the California Assn. of Realtors announces its 1994 results next week, the group is expected to report that resales of single-family houses in the state rose about 6%, to roughly 465,000 units.

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That would be smartly higher than the modest 2.2% gain of 1993, but it might have been stronger had interest rates been stable, analysts said. The upward march of rates began slowing sales in late 1994, and they will limit this year’s sales gain to about 4.5%, said Leslie Appleton-Young, the association’s vice president of research and economics.

“Will there be an impact? Yes,” she said. “Where will it be felt? More strongly among first-time home buyers, who were kind of sneaking into the market anyway” through adjustable mortgages offering cheap rates in the first year, Appleton-Young said.

The rate hikes also began taking their toll on nationwide sales of new houses in last year’s final quarter, limiting the annual sales gain to a scant 0.6%, the Commerce Department said Thursday. Still, that was the highest level of sales in six years, the agency said.

In the West, where California accounts for about half the activity, sales of new homes rose 1.6% for the year to 191,000 units but were off 12% in the final month, the department said.

When rates began rising early last year, many homeowners flocked to adjustable loans. Countrywide Credit Industries Inc., the big mortgage lender in Pasadena, said nearly half its new loans in the quarter ended Nov. 30 were adjustable ones, compared to 17% a year earlier.

But adjustables are a lot more expensive today.

Mortgage News Co. in Santa Ana, which tracks the mortgage costs with about 100 Southern California lenders, said the initial rate on a typical adjustable-rate note tied to the yield of one-year Treasury bills was just under 4% a year ago. On Thursday it was 7.19%.

Some other adjustables are tied to the so-called 11th District cost of funds. That rate, calculated by the Federal Home Loan Bank of San Francisco, tends to move more slowly than Treasury bill rates, but it, too, has climbed. It stood at 4.6% in December, its highest level in two years.

Meanwhile, conventional 30-year mortgages with fixed interest rates--many of which are tied to yields on 30-year Treasury bonds--have been stable in recent months at around the 9% level.

As starting prices of adjustable-rate mortgages climb closer to fixed-rate loans, the fixed rate is regaining popularity.

“They’re concerned about the rates going up further, so a lot of the buyers are not asking for adjustables now,” said Marty Rodriguez, an agent with Alosta Inc., a Century 21 realtor in Glendora.

Whether fixed or adjustable rates predominate, sales in general are being retarded by the Fed’s rate hikes, though the higher rates won’t be enough to stop housing’s recovery, some analysts say.

“I don’t think it will have a major effect on slowing the market over a long period,” said John Hekman, a vice president with Economic Analysis Corp., a research firm in Century City.

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U.S. New-Home Sales

Seasonally adjusted annual rate, in thousands of units:

Dec. 1994: 637

Source: Commerce Department