The interest rate on FHA- and VA-insured single-family mortgages will drop a full percentage point today to 14 percent, the lowest it has been in 16 months, the Department of Housing and Urban Development and Veterans Administration said yesterday.
The change, the second decline in the government-mandated rate in two weeks, was hailed by members of the housing industry as a modestly significant boost to the depressed housing market. Industry economists also predicted that the relief will be temporary, that mortgage rates will continue to decline for another few months but then will rise again in the winter.
Fourteen percent "is the threshold rate we have been talking about for years" -- the rate at which potential homebuyers will come back into the market -- said Mark Riedy, executive vice president of the Mortgage Bankers Association. "There won't be a flood of new buyers , but . . . it will be a steady stream," he said.
Short-term interest rates have fallen dramatically in the past few weeks, while long-term rates -- such as on mortgages -- have shown a more moderate decline.
FHA traditionally tries to lead the market in rate declines, and that is the case now. The market rate for conventional mortgages (those not insured by FHA or VA) is about 15 to 15 1/2 percent now, according to industry analysts. FHA and VA mortgages together typically represent about 20 percent of the mortgage market.
Jack Carlson, chief economist for the National Associaton of Realtors, said the greatest impact of the FHA rate decline will be psychological. It could encourage lenders to bring down rates on conventional mortgages and also could act as a signal to discouraged buyers to start looking again at residential real estate.
Louis Thompson Jr., senior staff vice president of the National Association of Home Builders, said the rate drop will help in some areas but that it is a little late in the building season now for it to have a strong impact on home construction this year.
"Builders are still in the foxholes," Thompson said. "I just don't see the attitude to spring back into action."
The FHA rate on single-family home loans reached a record 17 1/2 percent last fall and fluctuated between 15 1/2 and 16 1/2 percent from October into August. On Aug. 9, the FHA-VA rate was lowered from 15 1/2 percent to 15. Yesterday's announcement included a one percentage point drop in all FHA-insured mortgage rates.
Housing economists predicted that mortgage rates might decline another percentage point in the next two or three months and then begin to rise again in the winter.