Fed’s Rate Hike Dims Homeownership Dreams : Real estate: Mortgages follow interest trends over the long term and are expected to rise after a brief dip.

The sweet dream of homeownership is turning ever more sour as the Federal Reserve’s seventh interest rate hike in a year last week made mortgages less affordable to home buyers.

But the central bank’s aggressive fight against inflation may, over the long haul, put that dream within reach of more Americans for a brief time.

Just after the Fed’s move, the rate on 30-year fixed-rate mortgages, the most popular type of home loan, fell by nearly one-quarter percent from a week ago, according to a survey by an industry publication.

The nationwide average of 8.83% was the lowest since September, said Robert Heady, publisher of the Bank Rate Monitor newsletter.

This is because the 30-year mortgage rate is determined by the bond market, which has been expecting the rate hike and has welcomed the inflation-fighting tactic.

“The bond market has reacted by lowering long-term bond yields and bringing down mortgage rates with them,” Heady said.

However, mortgages follow interest rate trends over the long term and will therefore rise again after the brief dip, analysts said.

“I do not see any immediate effect on housing from the latest Fed rate hike,” said David Lereah, chief economist at the Mortgage Bankers Assn. of America. “Six months down the road, this rate hike will eventually inhibit activity.”

Economists said the Fed’s rate increases will dampen economic growth this year, and more consumers may shy away from making major purchases, such as buying a home.

“The most important thing is consumer confidence,” said David Berson, chief economist at the Federal National Mortgage Assn.

Also, adjustable mortgages, which half of all borrowers turned to last year as a lower-cost alternative to fixed-rate loans, may now be too costly even with their low introductory or “teaser” rates.

Adjustable mortgages tied to the one-year Treasury bill now start at 6.7%, compared with 4.13% a year ago. Analysts expect the rate to hit 7.0% to 7.25% later this year.

This will price some first-time home buyers out of the market and cost homeowners with adjustable mortgages about $10 billion in extra monthly payments, Berson said.

Home sales are also expected to decline up to 7% to 3.75 million units this year from 1994, the industry’s best year since 1978, thanks to a booming economy and jobs growth, said John Tuccillo, chief economist for the National Assn. of Realtors.

But housing experts said the industry, accustomed to cycles of boom and bust, will weather the rate hikes reasonably well.

“Interest rates are relatively low, compared to where they were in the last decade,” said Michael Carliner, economist for the National Assn. of Home Builders. “By those standards, buying is still relatively affordable.”

Moreover, the U.S. median home price has risen to $109,400 last year from $106,800 in 1993 and is expected to keep rising for the next couple of years as the economic recovery continues, Carliner said.

“This will be a good year,” said Tuccillo.