The patterns of housing starts and mortgage interest rates tend to follow the same cyclical changes, affecting U.S. business and also the plans and aspirations of potential home buyers.

However, interest rates tend to peak slightly after an upturn in housing starts and then fall back after housing production has tailed off. Currently, housing starts are in a high period, with total 1977 starts having exceeded 1.98 million. In recent months, conventional mortgage interest rates have been moving up to the current level of 9 1/4 to 9 1/2 percent. As the result of those pressures in the private mortgage market, the FHA-VA rate ceiling was increased to 8 3/4 percent five weeks ago. It still lags the conventional mortgage interest level by at least 1/2 percent.

Accompanying charts show how housing starts and mortgage interest rates have moved up and down during the past decade. But the ups-and-downs in housing starts show sharper variations in both highs and lows.

Late last year most housing predictions indicated that higher mortgage interest rates could be expected. So far, those interest rates have risen moderately. And there are signs that upward pressures will continue to be felt for a few more months.

However, housing start forecasts for 1978 were not unanimous. The organized home builders predicted a fall to the 1.78 million level, whereas the organized mortgage bankers more optimistically predicted through staff economist John M. Wetmore that starts would increase to 2.1 million this year. It is too early to know which forecast will prove more valid, but it seems reasonable to expect the hard total will be somewhere between those extremes.

In the first three months of 1978, there are indications that the level of housing starts is continuing strong - despite horrendous weather in January and February. And the resale market has also continued at healthy levels throughout the nation. But the real effects of higher mortgage interest rates and possibily some lessening in the amount of loanable funds might produce fairly drastic results in the months ahead.

Recently, economist Kenneth Plant of the Federal Home Loan Mortgage Corp., which creates a secondary market for conventional mortgages, estimated that housing starts have "probably already peaked and will be declining gradually throughout 1978, after recovering from the January level which was depressed by the weather." He added: "Housing starts (in the remainder of this year) will reflect the increasing tightness of the credit markets. While the basic demand for new units will support a 2 to 2.2 million level, mortgage financing will be less available and at a higher rate than in 1977."

Plant added that mortgage rate softened a year ago in response to record level inflows into thrift institutions that supply private mortgage credit. But he noted that there now is evidence of a lower level of saving inflows, continued high levels of demand for mortgage financing and even expectations of rising rates.

In this area, both new and existing house sales have been strong in the first three months of 1978. J. Ronald Weismiller, president of the area Mortgage Bankers Association and an executive with Weaver Bros., perceives no shortage of mortgage lending funds coming into this area from outside sources. But he added that housing starts may decline this summer due to both rising costs of construction and mortgage credit. He also noted that secondary markets for mortgage loans tend to provide more available new mortgages now than several years ago but that conventional lenders (thrift institutions) may face an outflow of savings that has become somewhat traditional in April, when many depositors withdraw from accounts to pay their income tax bills.

Charles Janes, executive vice president of Steed Mortgage here, said tht conventional rates might rise to 9 3/4 by summer and that another upward boost in the FHA-VA interest rate ceiling could be expected if the mortgage discounts points (paid by sellers to get [WORD ILLEGIBLE] loans at rates below the market [WORD ILLEGIBLE] from the current level of 4 to 5.

[WORD ILLEGIBLE] "point" is a 1 percent of the total sum paid in cash up front when the loan is made. On FHA-VA loans, buyer are permitted to pay only one point [WORD ILLEGIBLE] seller-paid points are unlimited. Sometimes points are charged to conventional mortgage loans but they are prohibited by law in Maryland.

Edward T. Briner, a Northern Virginia mortgage banker (A.E. [WORD ILLEGIBLE] Inc.) commented that mortgage interest rates tend to rise and fall in reaction to the bond markets. He added that the higher level of mortgage yields in recent months has also stirred some interest in re-entering the mortgage investment field by life insurance companies that took themselves out of it several years ago to seek higher yield investments on shorter terms or to take equity positions with developers.

At a recent meeting of D.C. builders President T. William Blumenauer of Columbia Federal Savings and loan, warned that "the news so far this year is ominous as it concerns the outlook for the housing industry." He noted that members of the Metropolitan Washington Savings and Loan League paid out in withdrawals in January about $5.5 million more than they received in new savings. That compared with a positive inflow of $26.9 million January in 1977.

Blumenauer posed his own question about another mortgage crunch such as that which occurred in mid-1973 to quickly take the steam out of what then was a hot housing market for both new and existing house sales. "It's very possible but probably not as likely to be so severe," he answered.

Charles V. Phillips, an executive with the Kettler building firm and president of the area home builders association, said, "All builders are watching the mortgage market closely" to determine if there is a "hardening of available mortgage credit." Up to this point, he added, there has been no real problem because the buyers of upper-priced new houses still seem to be able to get new mortgages and to get financing for the homes that they are selling.

To find a long-term solution to ending the recurring problems of high interest rates and a tight supply of mortgage money, Washington builder Alvin Sacks has urged that the roller-coaster effects of housing cycles might well be attacked by a federally constituted group which would "set goals rather than forecast results. Its operating philosophy would challenge longheld political beliefs that government-sponsored economic planning is both undemocratic and useless.

"Under my scheme, the government would only be a facilitator and serve as an equal partner with many other members. The success of this new group would rest on voluntary cooperation by most large and small business enterprises involved in the fragmented housing industry."

Sacks commented that the congressionally legislated goal of 2.5 million new houses annually was 'unrealistic and set too far into the future. Although the conference procedure I'm suggesting may be more cumbersome, it should better reflect views of all interested parties in the light of changing economic conditions. Thus, the need for an annual review."

As a builder who has dealt with housing feast-famine cycles for two decades, Sacks noted that the group he is suggesting would have to view the "whole society as its constituency and not solely the home building industry. The level of our knowledge does not yet enable us to eliminate business cycles, but we have made strides to soften some of their harmful effects. Why not a combined, voluntary effort to extend our gains?"

Meanwhile, 1978 now appears to be another strong year for the production and sales of new housing and for the resale housing market - if mortgage credit continues to be available at rates that do not turn off public demand. The consumer appetite for housing investments has been widened both by two-income families and an increasingly high regard for residential properties as good investments.

There is some concern that the currently high level of housing investments by individuals and couples could soften quickly if mortgage credit becomes difficult to obtain for resale houses, or if the rates become high enough to make meeting monthly amortization payments impossible for the current crop of high-income buyers. That's the reason that 1978 appears to be currently optimistic but nonethe less "iffy" for the housing market that has been gathering steam for more than two years.