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Mortgage Rates Spurt in Wake of Fed Action

September 13, 1987|DAVID W. MYERS | David W. Myers is a Times real estate writer.

Mortgage rates continued to rise last week after the Federal Reserve Board raised a key lending rate it charges to financial institutions, and many economists say rates will move even higher within the next few months.

Further increases could knock thousands of would-be home buyers out of the market because they could no longer qualify for a loan, and many current owners with adjustable-rate mortgages may see their payments rise sharply, economists said. Higher mortgage rates could also cost the construction industry thousands of jobs.

The rate increases also prompted some analysts to lower their projections for this year's home resale activity. The National Assn. of Realtors, which earlier had predicted that this year's home resale rate would match last year's 3,565,000 in sales, now says 1987 activity may fall short of a year ago.

"We have closed the door on the five-year decline in mortgage rates," said Mark Obrinsky, an economist with the U.S. League of Savings Institutions in Washington.

By Wednesday of last week, rates on 30-year, fixed-rate mortgages had risen to an average 10.79% from 10.46% the week before, according to Compufund, a computerized mortgage network based in Santa Ana. Initial interest rates on adjustable-rate loans at some financial institutions had jumped nearly half a point.

Fixed mortgage rates could rise another one-half of one percentage point by the end of this year and another one-quarter of a point by next spring, economist Obrinksy said.

Last week's mortgage rate increases were triggered by the Federal Reserve Board's Sept. 4 announcement that it would raise the discount rate to 6% from 5.5% in an effort to stabilize the falling dollar and ease inflationary fears.

Many large banks raised their prime lending rate to 8 3/4% from 8% immediately after the Fed's announcement, and the Veterans Administration raised the rate on loans it will insure to 10 1/2% from 10%.

Rates offered by most lending institutions continued to drift upward through last week, with some lenders quoting fixed rates as high as 11%.

See Another Move

Most analysts believe mortgage rates will move even higher before the year is over, in part because the discount rate will likely have to be raised again to prop up the sagging dollar and curb fears of inflation.

John Tuccillo, chief economist for the National Assn. of Realtors, said rates would likely climb past the 11% range by the end of this year. If his predictions prove correct, Tuccillo said, the seasonally adjusted annual sales rate could drop to about 3 million units from the current 3.5-million pace.

Prospective first-time home buyers will suffer most from rising rates, Obrinksy said, because they will have a harder time qualifying for a loan and, typically, can't afford to make a larger down payment to reduce their monthly mortgage costs.

The higher rates could also deal a harsh blow to the construction industry, which employs about 3 million American workers.

Apartment construction has already plunged this year, primarily because many multifamily markets are overbuilt and tax-reform took away many of the tax benefits apartment builders used to enjoy.

Home Sales Slackened

But new-home sales have also slacked off recently, dropping in four out of the last five months. A continued downward trend in sales could cost the industry thousands of jobs.

Despite the recent upturn in rates, economists at the National Assn. of Home Builders are sticking by their earlier projections that 1.63 million housing starts will be made this year, down a modest 9% from last year's torrid pace.

Last week's rate increases will also mean higher monthly payments for homeowners with adjustable-rate mortgages, Obrinsky said.

Ironically, many of the people who have bought homes during the last several months have chosen an adjustable loan instead of a fixed-rate mortgage because fixed rates surged in April, while rates on ARMs remained flat. "Now, rates on ARMs are going up, too," Obrinsky said.

Oddly, the rate increase might also dampen the strong "seller's market" that has been the hallmark of this year's housing scene.

"Some buyers will be squeezed out of the marketplace, so the buyers who can still afford to make a move will have more of a selection and a little more room to negotiate," said Joel Singer, chief economist of the California Assn. of Realtors.

But, says Singer, "I'm not talking about a whole lot of room to negotiate--inventory (of homes for sale) is still very low. It'll remain a sellers' market, but it won't be quite as strong as it was earlier this year."

Sees Future Benefits

NAR economist Tuccillo sees some long-term benefits from the discount rate boost, even though some borrowers will undoubtedly suffer from the higher mortgage rates the increase has spawned.

The higher discount rate should slow corporate borrowing activity, Tuccillo said, which should prolong the nation's five-year-long economic recovery and help keep inflation in check.

"Long term, the increase in the discount rate will be good for the overall economy," Tuccillo said. "But temporarily, it's not too good for the housing market."

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