Rates on 30-Year Mortgages Fall Below 8%

The average cost of a 30-year fixed-rate mortgage dropped below 8% this week for the first time in more than a year, the Federal Home Loan Mortgage Corp. said Thursday.

The rate fell to 7.87%, down from 8.27% last week and the lowest since March 24, 1994, when it was 7.80%. It rose to 8.04% the next week and continued to rise until it reached 9.25% during the weeks of Nov. 23 and Dec. 15.

Analysts said mortgage rates are following the lead of the bond market, which has rallied recently, pushing interest rates down. Prices and yields move in opposite directions.

“The reason is that recent economic indicators have confirmed the slowing in economic growth while inflation remains safely under control,” said Frank Nothaft, an economist for the Federal Home Loan Mortgage Corp., also known as Freddie Mac. “As a consequence, it’s very unlikely the Federal Reserve will take further restrictive action, and (it) may become a bit more accommodative later this year.”

The Federal Reserve Board has raised short-term interest rates seven times over the past 15 months to slow the economy and keep inflation at bay.

Nothaft predicted mortgage rates will stay in a range of 7.5% to 8% for the rest of the spring before moving into the low 8% range in the second half of the year.

“But even that is a very affordable mortgage market,” he said. “It’s one of the most affordable in the last quarter-century.”

Thirty-year mortgage rates were in the double-digit range throughout the 1980s.

In any event, the weak economy will probably continue to have a negative effect on the housing industry, which has seen shrinking housing starts and declining home sales because of high mortgage rates. “We still expect home-building activity to be weaker in 1995 than in 1994,” said Michael Carliner, an economist with the National Assn. of Home Builders.

On one-year, adjustable-rate mortgages, lenders were asking an average initial rate of 6.12%, down from 6.26% last week, the Freddie Mac survey shows.

Fifteen-year mortgages averaged 7.45% this week, down from 7.80% a week earlier.