Potential buyers awaiting lower interest rates may spend 1998 straddling the fence. National economists predict long-term mortgage rates will rise slightly from 7 percent to about 7.5 percent by the end of the year.
After interest rates hovered between 7 and 8 percent for most of 1997, fence-sitting buyers hoping for optimum rates may get saddle sores by the end of 1998.
The climate of buyer-friendly interest rates has resulted in several mortgage trends, experts said.
First, the early 1990s boom of homeowners refinancing is long gone. The exception for refinancing is buyers who bought a house about 18 months ago with loans at 8.5 percent fixed interest or those with adjustable-rate mortgages.
Another trend is that adjustable-rate mortgages can no longer compete as well with the lean 7 percent fixed-rate loans. The advantages of getting adjustable-rate mortgages instead of fixed-rate loans are much greater during periods of high fixed rates.
David Lereah, chief economist for the Mortgage Bankers Association of America, predicted rates for adjustable mortgages would range from 5.51 percent in the first quarter of 1998 to 5.69 percent in the last quarter. Last year’s average rate was 5.59 percent for adjustable loans, he said.
In terms of popularity, adjustable-rate mortgages will be at their lowest level since they were introduced in the early 1980s, said Eileen Neely, senior economist for Fannie Mae in Washington, D.C. Such mortgages have lost popularity as long-term rates have dropped severely, especially since the beginning of this decade.
In 1984, fixed rates were running about 14 percent, and three out of every five buyers opted for an adjustable rate. Neely predicted less than one in every five mortgages will be adjustable in 1998.
“The advantages of taking out an ARM (adjustable-rate mortgage) simply aren’t there,” Neely said.
With fewer refinancings and adjustable-rate mortgages, buyers are left with an old favorite, the 30-year, fixed-rate mortgage.
“That is the trend,” Neely said. “The return to the traditional mortgage.”
What the traditional mortgage has in store for buyers is basically more of the same. Fence-sitters and rate-watchers can expect rates for the first quarter to be about 7.23 percent, according to forecasts from the Mortgage Bankers Association. In the spring and summer, the rates should be about 7.42 percent to 7.44 percent, and the year should end around the 7.47 percent mark, predicted Lereah.
Some analysts see rates falling more than that, because of fallout from problems in Asia.
In comparison, 1997 had an average rate of 7.59 percent for 30-year, fixed-rate loans.
The number-crunchers’ bottom line is 1998 will be a healthy year for sales, particularly for existing houses.
John Tuccillo, consulting economist for the National Association of Realtors, predicted 1998 will be one of the best years for existing houses sales. Reasons for the strong house-sales climate vary. Tuccillo offered three:
– The Federal Reserve has done a great job of walking the line between inflation and economic growth. Tuccillo predicted a 2 percent level of inflation over the next 11 months. The low inflation rates not only keep down the price of construction materials, they discourage an increase in interest rates.
– Consumer confidence and incomes are up. People are embracing entrepreneurship and capitalism to a greater degree than they had in the past, Tuccillo said. People are more likely to invest in a house or move up to a more expensive home when they are confident the economy is strong, he added.
“The psychology working in the market is absolutely marvelous,” he said.
– Most members of the Baby Boom generation are in their 40s and will continue to strengthen the economy for another 10 years. Having so many Americans in their peak earning years further strengthens the economy and move-up housing market, Tuccillo said.
He pointed to two “wild cards” that could spoil the good times. The Asian markets, which have been tumultuous for months, may calm down, and foreign investors who saw the United States as a haven for their country will start putting their money back into the Asian economy.
Also, an unusual warm Pacific weather pattern called El Nino is expected to cause food shortgages in several continents, Tuccillo added. The effects of overseas famine on the U.S. economy and housing market will depend on the government’s response to the matter, he said.
