Wall Street Has Comforting News For Would-Be Home Buyer Interest Rate Decline Likely To Continue Into 1997

Wall Street’s conventional wisdom that the economy is cooling down is translating into savings for home buyers.

Mortgage rates have been falling nationally since early September, according to numbers tracked by the Federal Home Loan Mortgage Corp. (Freddie Mac). This week the average interest on a 30-year fixed-rate mortgage fell to 7.67 percent from 7.78 percent last week, and down from a high this year of 8.42 percent in July.

In February rates fell to as low as 6.94 percent. (The current rate assumes the borrower is paying 1.8 points in loan origination fees; a point is equal to 1 percent of the loan amount.)

“Rates have come down pretty consistently for probably the last six weeks,” said Eileen A. Neely, a senior economist at Fannie Mae. “The primary reason is that among economists and Wall Street, but mostly Wall Street, the vision of what the future looks like has changed. Everyone is talking about a slowing economy and stable, even slowing inflation, and no Fed upward change in rates.”

“A month, a month and a half ago, that would have been the minority view,” she said. “It’s not that things have changed, it’s that the view of things has changed.”

Wall Street traders, particularly bond traders, directly affect mortgage rates because they determine the levels at which lenders can obtain money and resell mortgages. Inflation, feared as a byproduct of a fast-growing economy, sends interest rates up.

Interest rates still are not low enough to trigger a big wave of loan refinancing among current mortgage holders, housing economists said. For buyers taking out new mortgages, a half-percentage-point change in rates translates into savings of about $35 a month on a $200,000 mortgage.

Economists for three major Washington real estate organizations agree that mortgage rates will remain basically stable for the next few months, with the possibility of minor fluctuations. But they disagree on the direction of those fluctuations.

Neely said she believes interest rates will stay stable for the next three to four quarters, “although there is room to drop.”

Her counterpart at Freddie Mac, Robert Van Order, said he also thinks rates will stay about the same into next year. “I think somewhere in the 8 percent range, maybe somewhere under that, is reasonable. … It’s almost as if we’re in some kind of equilibrium.”

David Lereah, chief economist at the Mortgage Bankers Association of America, also sees flat or slightly lower rates for the rest of this year, but believes there will be a small increase next year. He predicted rates will “creep up” to hit 8.3 percent by the end of 1997.

Those who watch interest rates closely track the actions of the Federal Reserve, which sets a key rate. The Fed, which will meet Wednesday, is widely expected to leave that rate unchanged because recent economic indicators have shown moderate economic growth.

Shifts in interest rates affect both home buying and refinancing decisions, but not as much as they once did, according to the economists.

That’s because in recent years rates have been reasonable, compared with the double-digit rates of the 1980s, and because lenders offer many mortgage types.

Since 1992 rates generally have ranged from 7 percent to 9 percent, although rates bottomed out in late 1994 at about 6.75 percent.

“Home buying is no longer as interest-sensitive,” Neely said.

“Right now there’s such a wide array of mortgage products available that if a 30-year fixed-rate is too high, they can opt for a one-year (adjustable-rate mortgage) or a seven-year balloon or a 3-3 adjustable or whatever,” she said.

Refinancing also has become much easier and much cheaper, Neely said. “People I know go out and buy a house and say, ‘If in six months rates fall, I can refinance.’ “