Friday's increase in the prime lending rate will lead to a one-quarter to one-half percentage point increase in fixed-rate mortgage rates over the next week or two, an increase that is almost sure to have a chilling effect on San Diego's housing market, industry officials said.
The anticipated rise in mortgage rates will especially affect the county's new housing market that in recent months had already shown signs of weakness after more than three boom years, the officials said. The slowdown has been caused mainly by the hike in average new home prices, which in turn was attributed to the jump in San Diego County land prices.
The increase announced Friday by the Federal Reserve Board raising the federal discount rate to 6% from 5.5% was followed hours later by major banks raising their prime lending rates to 8.75% from 8.25%.
Mortgage lenders will react soon by raising 30-year fixed-rate mortgages to 10.5% to 10.75% from the 10% to 10.25% rates being quoted by many mortgage lenders last week, officials said Friday. As recently as March--when both new home sales and resales were at their peak in San Diego County--fixed-rate mortgages were available at rates as low as 8.75%.
Expect Movement Up
"Undoubtedly, you can expect to see movement up in mortgage rates across the board over the next week or so," said Dennis Casey, vice president of retail loan services for Home Federal Savings & Loan. "Any kind of (interest rate) upturn impacts loan volume, especially fixed-rate loans."
The worst may not be over for prospective home buyers. Casey predicted that mortgage rates will continue to rise through this year and into 1988. "Our economics people tell us we are in a rising interest-rate environment now and will be through next year. How much rates will rise and how soon is anybody's guess," he said.
The mortgage rate increase will make housing less affordable at a time when the so-called affordability index--the ratio of household income to average house payments--is at its worst point in two years, said John Musial, executive vice president of McMillin Development Inc., a San Diego County home builder.
To illustrate the interest rate increase's impact on affordability, San Diego Board of Realtors President Susan Ditler-Brown said monthly payments on a 30-year, fixed rate loan of $100,000 at 10.5% interest is $840, compared to an $806 monthly payment on the same loan at a 10% rate.
Battered by Steep Increase
Apart from rising interest rates, affordability is being battered by the steep increase in average new home prices in San Diego. Steve Bottfeld, president of Insites, a San Diego-based new housing market research firm, said average-priced new homes in the county cost $159,000 in August, up from $130,000 a year ago.
Average San Diego resale prices in July, the last month for which figures were available, declined slightly to $141,643 from the $142,772 average in July 1986, according to the San Diego Board of Realtors. Year-to-date average sale prices were up, however, to $142,823 through July, compared with $134,606 over the same seven months in 1986.
New housing prices have been inflated by two factors, Bottfeld said. First, developers of most master-planned communities have already sold the lower-priced housing in their projects, leaving higher-priced "move-up" product remaining to be sold.
"The emphasis of builders at the beginning of the current housing market cycle in 1983 was to sell to low-priced housing to first-time buyers. The last couple of years, the emphasis has been on more expensive homes and the move-up market," McMillin's Musial said. His company's houses now sell at an average price of $200,000, he said.
Secondly, San Diego County land prices have take huge price jumps in the last year as the market has adjusted both to shrinking availability of undeveloped land and to the slow growth initiatives imposed by many communities that have tended to limit supply, Bottfeld said.
"Land prices have gone crazy. We have seen the same piece of unsold ground in Oceanside, for example, increase to $59,000 per finished lot from $36,000 per lot, just over the last six months," Bottfeld said.
To solve the affordability problem, more home buyers will be turning to variable rate mortgages in order to qualify for home loans, said Home Fed's Casey and Tom Stickel, president of TCS Enterprises, a San Diego mortgage banking firm. Six months ago, 90% of new loan applications at Stickel's firm were for fixed-rate mortgages. Now, 90% of Stickel's applications are for variable rate loans.
Variable-rate loans have initial interest rates that, depending on the kind of loan, start out at lower-than-market rates ranging from 6.9% to 9.5%, Stickel said, increasing a year or so later to rates tied to lenders' cost of funds.