Does housing economist James F. Smith know something nobody else does?

Smith, chief economist at the National Association of Realtors, closed on a house purchase in Alexandria Thursday. His mortgage? A one-year adjustable at 5.25 percent. Why a one-year? Because, unlike many other housing economists, Smith thinks fixed-rate mortgage rates will go down this year and into the next.

Really?

The Federal Reserve is expected to announce next week that it will raise a key interest rate -- the benchmark federal funds rate -- to 5 percent from 4.75 percent.

And when the Fed plays around with interest rates, the conversation around Washington dinner party tables inevitably turns to mortgages.

But nobody needs to worry, Smith said. Contrary to what many Wall Street analysts are predicting, Smith believes that mortgage interest rates, still quite low by historical standards despite their upward drift in recent months, will go down later this year.

"Rates for a 30-year fixed mortgage should be down around 6 percent by the end of this year, plus or minus a bit," he said. The Mortgage Bankers Association sees a downward trend as well, although not as significant a dip as Smith predicts.

This week, interest rates for a 30-year fixed-rate mortgage averaged 7.63 percent, down from 7.65 last week, Freddie Mac said. The rate has been increasing since late January, when the 30-year rate was at a low of 6.74 percent.

"Interest rates are ridiculously high in relation to inflation," Smith said. "That would suggest that they will come down."

But that's pretty much the opposite of what Cynthia Latta, chief U.S. economist at Standard & Poor's DRI, the economic forecasting and consulting firm, believes.

"Mortgage rates could go higher," she said. "They're not likely to go lower.

"If someone is planning on buying a house at the end of the summer, maybe they should just do it now," Latta said.

Mortgage rates don't directly follow actions of the Federal Reserve, and so their movement is hard to forecast. Rates on mortgages are set by market trading, but the 30-year rates tend to follow the yields on 10-year Treasury securities.

Because the average life of an American mortgage is eight years, mortgage-granting institutions use the yield on 10-year government notes as a benchmark for calculating their 30-year fixed-rate mortgage offerings. Mortgage rates usually come at 1 percentage point and 2 percentage points higher than the yield on government securities.

Adjustable-rate mortgages, which change rates at determined intervals, follow short-term rates, which are more directly affected by Fed movements.

"Short- and long-term interest rates do not move in lock step," said Robert Van Order, chief economist at Freddie Mac, which buys mortgages, packages them and then sells them as securities on the secondary market. "For long-term rates, like mortgages, it's not just what the Fed does. Their context is the economy as a whole and inflation in particular."

Even so, Fed moves do indirectly affect mortgage rates. But oftentimes, the effect comes before the cause, so to speak. Like this time.

Housing economists believe that mortgage rates have been rising in the last few months in anticipation of an increase next week by the Fed. And so the increase, expected to be a quarter percentage point, will have little impact when it occurs -- unless it varies from expectations.

"Rates have been going up most of this year in anticipation that the Fed will do something," Van Order said. "If the Fed does differently than what is expected, then it will have some effect."

The Fed tinkers around with interest rates in an effort to fine-tune the economy. This time, policymakers from the Fed's Federal Open Market Committee are acting to slow growth of what they fear could become an overheated economy and in an effort to keep inflation at bay.

And many experts are now predicting a further tightening at the group's Aug. 24 meeting.

"It depends on what the expectations are," economist Smith said. "Everyone is now expecting a quarter-percentage-point move. But if they raised it half a percent, the [price of] 10-year [Treasuries] would shoot up, yields would go down and so will mortgage rates."

In the meantime, some people in the Washington area are choosing 30-year fixed-rate mortgages, fearful of rates moving up, mortgage brokers report.

About 72 percent of people getting mortgages from January to April picked 30-year fixed-rate loans, according to figures from the Mortgage Bankers Association.

"As the rates have gone up, more and more people have been opting for the 30-year option," said mortgage broker Carrie Staples of brokerage Sigma Financial Services. "There's a feeling among many of my clients that it's good to get in before rates go any higher."

"I'm not always right," Smith said about his contrarian predictions. "If I was, I wouldn't need to work for a living."

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