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Rising Mortgage Rates Shake but Don't Break State Housing Industry : Real estate: Economists say affordability of homes remains high for now. But the threat of double digits is causing more than a few ulcers.


The jump in interest rates on home loans that began last October has caused plenty of heartburn and uncertainty in California's housing industry, but the increases have yet to imperil the state's modest real estate recovery that began in early 1993.

What's more, even if rates continue to rise as expected, real estate experts doubt that the damage will be severe--provided the increases do not carry rates well into double digits. Economists say that's because housing affordability remains high and home prices remain low--at least by California standards.

Tom Lieser, an economist at the Business Forecasting Project of UCLA's Anderson School of Management, said rates would have to rise to more than 12% to offset the decline in housing prices since the peak of 1990. And few economists see rates rising soon to the double-digit levels they last reached in 1990.

Nevertheless, rates have climbed more than two percentage points in the last year, causing considerable turmoil in the mortgage market statewide and nationally. Consider:

* People holding large adjustable-rate mortgages have seen their house payments soar by hundreds of dollars a month.

* The amount of new loans has plummeted. The Federal Home Loan Mortgage Corp., or Freddie Mac, says national loan originations in 1994 will amount to $710 billion, a sharp drop from 1993's $1 trillion.

* Refinancings, which reached record levels in 1993 as interest rates fell, have declined drastically. Freddie Mac projects that refinancings will constitute only 33% of the total loan market nationally, compared to 56% last year.

* Borrowers are turning away from fixed-rate loans and moving toward adjustable-rate mortgages. Adjustables will constitute 35% of loan originations nationally in the third quarter of 1994, up from only 17% in the same period last year, Freddie Mac reported.

Some lenders have tried to narrow the so-called spread between rates for fixed-rate mortgages and adjustable-rate mortgages, making the fixed loans relatively more attractive. But loan brokers say adjustable-rate loans remain popular.

The average rate in the Los Angeles area for a 30-year, fixed mortgage broke the important 9% psychological barrier this week, rising to 9.01%, compared to a low of 6.81% a year earlier, according to a survey by HSH Associates, financial publishers in Butler, N.J.

Similarly, the average starting rate for a one-year, adjustable-ratemortgage in the Los Angeles area reached 5.84%, compared to a low of 3.93% a year ago, HSH reported.

And rates promise to rise further, given the bond market's recent unease and speculation that the Federal Reserve Board may raise short-term rates again soon.

On Thursday, yields on the benchmark 30-year Treasury bond held firm at 7.94%, the highest level since June, 1992.

"Most people who have adjustable-rate mortgages . . . and who didn't refinance will see a two-percentage-point rise this year, there's no doubt about that," said Keith T. Gumbinger, an HSH analyst.

Still, the rate increases have not squelched the state's housing market. Sales of existing single-family homes statewide are still increasing on an annualized basis--up 4.8% in August over a year earlier, according to the latest figures from the California Assn. of Realtors.

And there remains pent-up demand for housing, said Gary Schlossberg, senior economist with Wells Fargo Bank in San Francisco. The state's incipient recovery and subsequent improvement in consumer confidence could help offset the effects of higher interest rates, he added.

For affluent homeowners such as Michael Walther, the rise in rates has meant higher monthly mortgage payments, though they haven't proven burdensome.

This year, Walther, 41, president of a computer software company in Irvine, has seen the interest rate on his adjustable mortgage rise two percentage points, the maximum allowable under terms of the loan on his $400,000 Laguna Niguel home.

That has meant an increase of $600 in his monthly mortgage payment, he said. The increase was not unexpected: Walther recently refinanced his home and is in only the second year of a new mortgage whose starting rate was a discounted 4.625%. Still, he says, "it made a little less of our money liquid."

Cheryl Hedman, an interior designer who lives in South Pasadena, was facing a $400 increase in the monthly mortgage payment on her four-bedroom house. The rate was scheduled to go up to 8.75% from 6.75%, she said.

But she and her husband avoided the increase by refinancing their adjustable-rate mortgage this month, getting a new loan with a starting rate of 6.75%.

Despite the increase in rates this year, housing in California remains relatively affordable, according to the Realtors Assn.

In August, 39% of the state's households could afford a median-priced home, the group reported. That's only a slight decline from the 40% affordability figure of a year earlier and well above the low of 14% in June, 1989.

Jon Girard, a manager with Kenneth Leventhal & Co., has seen the interest rate on his adjustable mortgage rise to about 7% from 5.5%, increasing the monthly mortgage payment on his Pacific Palisades townhouse to more than $2,300 from about $2,000.

But his payments are still well below the $3,300 he was paying on the 10.25% fixed-rate mortgage he had in 1990, before he refinanced two years ago.

"In hindsight, I'm glad I did it," he said. "It's always a crapshoot. But it paid off for us."

Going Up

Interest rates for both fixed and adjustable-rate mortgages are up from their near-record lows of October, 1993, and are likely to continue rising if, as expected, the Federal Reserve Board keeps raising interest rates.

Sept. 1994:

30-year, fixed-rate: 8.51%

Adjustable-rate: 5.47%

Source: Federal Home Loan Mortgage Corp.

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