Forecast Is for Slightly Higher Rates Next Year

If you’re looking for the bottom of the interest rate cycle to time your next mortgage application, don’t wait for postelection 1997. Rates in the new year are likely to be higher on average than in 1996--reducing opportunities for refinancing, new home construction, resales and affordable home buying.

That’s the word from two of the country’s most respected mortgage rate forecasters, David A. Lereah, chief economist of the Mortgage Bankers Assn. of America, and Lyle E. Gramley, a former Federal Reserve Board governor and consulting economist to the same trade group.

Both provided their projections for the coming year to the annual convention of the mortgage bankers here recently. The rate jump the two economists foresee won’t be dramatic; they predict an 8.3% average mortgage rate for a 30-year fixed-rate loan. But that’s up from the 7.9% prevailing nationally this month and represents a significant increase over the 7% of early 1996.

Even a moderate rise in the cost of money can have widespread ripple effects on housing markets. Next year, according to the two economists, new single-family-home construction starts are likely to drop by 7.3% and new home sales by 4.4%.

Even the resale market should feel the chill: Sales of existing houses are likely to drop by 4.2%, and the average appreciation rate in resale values of homes nationally is expected to drop to 2.3% from 1996’s 5.6%.

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The cause of all this impending softness? Ironically, it’s a little too much good news--an expansion in the U.S. domestic economy slightly more robust than optimal, according to Lereah and Gramley. That means more jobs, lower unemployment and higher wages than the system can handle without triggering an increase in the rate of inflation of the cost of goods and services.

So what does a 1997 forecast like this mean in practical terms for you as a new-home buyer, refinancer or move-up purchaser?

For starters, don’t even try to play the “time-the-low-point” game in the interest rate cycle. Even sophisticated traders of billions of dollars of bonds concede that it’s a tough game to win.

And for new-home buyers, it may not even be all that relevant. That’s because many builders are willing to assume the risk--or actual cost--of moderate jumps in rates and provide buyers with loan packages that subsidize the interest rate.

Rates in the overall mortgage market might rise by one-half percent in the first six months of 1997, in other words, but competitive builders are likely to shield you as a would-be purchaser from that change by offering “buy-down” financing through their own subsidiaries or cooperating mortgage lenders. Rates offered by aggressive builders in a highly competitive market might even go down in an upward rate cycle.

A second consideration, especially for move-up sellers and refinancers:

Higher fixed rates should motivate you to look to alternative types of loans. For example, in 1997, adjustable-rate 30-year loans are likely to be more attractively priced than in either of the two previous years.

Adjustables tied to one-year Treasury notes are likely to hover just over 6% versus 30-year fixed rates of 8 1/4% to 8 1/2%. The 6%-plus rate, by the way, is not an introductory “teaser” rate that’s only good for a few months. It’s the real thing, but will have to be re-priced at the end of the year.

If you can stand the possibility that your payments may be higher in 1998 or 1999, you may find that an adjustable makes sense for you in 1997.

Another form of adjustable that cuts your effective rate and protects you against sudden payment increases:

Loans that adjust just once during their term--either five years out or seven years out--and then turn into fixed-rate mortgages. Though rate discounts vary on these plans, they are typically one-quarter to one-half percent below standard 30-year fixed-rate quotes.

A caveat on cut-rate five- to seven-year loan plans: Read the fine print and make sure you’re not signing up for a “balloon” note that comes due and payable in a lump sum at the end of the initial rate period and cannot be converted into a fixed rate after that.

Ask also for details about what formula and index will be used to convert your adjustable to fixed rate as well as the fees--if any--that will be charged you for the conversion.

The bottom line about higher rate forecasts for 1997? No problem--as long as you know about, and explore, the lower rate alternatives available to you.

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Distributed by the Washington Post Writers Group.