Home sales are expected to continue at a moderate pace this fall, according to industry experts who also predict that mortgage interest rates will remain stable, rising slightly if at all.
At the same time, however, settlement costs and down payment requirements are expected to increase significantly because of an industry-wide tightening of credit standards and problems in the mortgage insurance industry. Those pressures could result in a slight downturn in the number of new homes under construction and future home sales this fall.
Economists with the National Association of Home Builders are predicting mortgage interest rates will rise by half a percentage point by the end of the year. Warren Lasko, executive vice president of the Mortgage Bankers Association of America, said he expects rates to rise from the current 12 1/4 percent for a conventional fixed-rate loan to 12 3/4 or 13 1/4 percent over the next six months.
The problem for housing, said Lasko, is that if the economy begins to rebound this fall, interest rates will rise, possibly shutting off the pace of home sales. Many industry experts consider a mortgage interest rate of 13 percent a "psychological barrier" for home buyers, and fear a return to rates above that threshold.
Even if interest rates stay below 13 percent, however, the overall cost of buying a home is expected to increase. First-time home buyers and people with little cash for a down payment will be hit hardest by the changes coming to the mortgage finance industry.
Many purchasers will be asked to make larger down payments, will be required to have higher incomes to qualify for loans and will have to pay more for mortgage insurance than they have over the past few years.
The Federal National Mortgage Association, known as Fannie Mae, announced last month that it will stop purchasing particularly risky types of adjustable rate and graduated payment mortgages. Fannie Mae will require people putting very little money into a down payment to have significantly higher incomes and less debt than allowed in the past.
Fannie Mae purchases roughly 10 percent of the home loans written by mortgage lenders, providing the lender with money to make more loans. The company then packages the mortgages and sells securities backed by mortgages on the secondary market.
Industry analysts say the move to tighten credit standards is part of an effort to reduce losses from a rising national foreclosure rate and to bolster the "sterling reputation" of the American home mortgage in capital markets.
Because many lenders sell home loans to Fannie Mae or other secondary mortgage market conduits, thrifts and banks are expected to incorporate the new restrictions into their own lending practices.
At the same time, concern over a surprisingly high foreclosure rate on loans where the home buyer has made a small down payment -- and therefore has little equity to lose -- has sparked a serious readjustment of private mortgage insurance rates. Some mortgage insurance companies have said they will stop insuring loans with a down payment of less than 5 percent.
In the past, home purchasers making a down payment smaller than 20 percent of the price of a house have been required by lenders to get mortgage insurance, to protect the lender in case the borrower defaults on the mortgage.