In the three weeks since the Federal Reserve Board raised borrowing rates and tightened the supply of money, all aspects of housing and real estate have felt everything from a pinch to a crunch.
Prospective home buyers and sellers are being turned off by the fatal combination of high lending rates and a shortage of available mortgage funds. Even FHA-VA mortgages, which often provide a market cushion when conventional loans are difficult to obtain, now are so costly to sellers (in terms of discount points paid for below market rates) that the additional 8- to 12-point costs, payable at settlement, are discouraging sellers.
Less then five weeks ago, the FHA-VA rate was set at 10 1/2 percent -- but that quickly became unrealistic in light of rising conventional rates. Federal housing officials yesterday raised the ceiling again -- to a record 11 1/2 percent -- as a means of keeping pace with new private market rates, which are ranging from 12 1/2 to 13 1/2 percent across the country.
Even this metropolitan area, where house sales have been strong since mid-1976, has felt the chilling effects of recent Fed actions to control inflation. Mortgage brokers and bankers are finding it increasingly difficult to avoid taking major losses in selling the loans they have accumulated.
This week, several mortgage companies here began laying off workers and taking other economy measures. Steed Mortgage Co., a large firm that specializes in low-interest VA and FHA loans, closed most of its offices. Steed was apparently unable to meet commitments it has already made.
Meanwhile, estimates indicate that the number of existing houses resold here in October will be 10 to 25 percent below the total for that month in 1978.
"Only because our builders have been burned before -- severely so in 1974-75 -- there is a relatively small inventory of unsold, completed houses in Northern Virginia," a housing association official said this week. Nonetheless, depressing effects of recent economic actions and reactions could give some buyers second thoughts about acquiring new houses on which they have made refundable deposits.
Even with mortgage rates at records highs, the market is such that sources of long-term, loanable funds have dried up because of alternative short-term investing opportunities at even more attractive rates. Savings and loan institutions are short of money because of a near-record outflow of deposits in September and earlier commitments to make loans. Most of the deposits were lost to higher-yield opportunities for small- and large-volume savers.
Housing Data Reports, which keeps a close watch on sales at more than 500 new housing projects in the area, reported that September houses sales were 18 percent above August levels and 13 percent higher than in October 1978. New newsletter describes the current market as "controlled panic."
Advance Mortgage Corp., which looks at the national housing markets, predicts that the current mortgage crunch will be "fully as severe as that of 1974 but even more jarring because it materialized so suddenly in the wake of the Fed's tough new credit policy (implemented of) Oct. 7."
A spokesman for the Northern Virginia Board of Realtors said that September resales totaled 1,904, compared with 1,753 a year earlier. But he added that there is early, scattered evidence of a general slowdown in October resales.
C. Jared Hale, president of Unity Mortgage Corp., said conventional loans now carry interest of 13 to 13 1/2 percent. He said demand has trailed off because of high rates and because buyers can't come up with the higher down payments now being required. The Fed, he asserted, made a "drastic error by squeezing too hard."
An increase in listings in the District indicates that a longer time than usual is needed now to sell houses, said a spokesman for the Washington Board of Realtors, adding that more price dickering is occuring as a result of the slowdown in the market.
In Prince George's County, Realtor executive Paul Fowler said that mortgage rates may go even higher. But he maintains that most brokers are finding financing sources for buyers.
"Some effects of the crunch are being felt," he added, "and there certainly will be curtailments in new projects with construction loans rates to high." Those loans are costing 16 to 17 percent in most areas.
Planners in Montgomery County reported this week that sales of new houses declined slightly in the first six months of the year, while resales of houses declined substantially -- by 20 1/2 percent over last year's levels. Both declines were attributed to the rapid increase in interest rates.
"It's obviously harder to qualify for a loan, when the down payment requirement is higher, along with the interest rate," said Hans Nestler, spokesman for the Montgomery County Board of Realtors. He said the board currently has more listings than usual as the result of a slower selling pace. Nestler said that the October resales may decrease by as much as 25 percent from a year earlier.
"But the median price of an existing house in this county is still around $75,000 and that means that as many houses are sold for that figure or less as there are sold for higher figures," he said.
While activity in the housing market is expected to taper off more than usual during the last part of the year, larger brokerage firms and their sales associates are continuing to use bridge loans, guaranteed buy-ins and equity loans to serve clients.
Thomas Shafran, senior vice president of Better Homes Realty, said that when the buyer of one house is selling another house a bridge loan can be used to span any difference in timing ot the settlements.
"If the purchaser has a sales contract on his existing house, it is usually not difficult to get an interim loan to go to settlement on the basis that the second settlement will follow in a few days or weeks," he said.
Wesley Foster, head of Long & Foster, another multi-office firm in this area, said that bridge loans can be obtained at the prime rate. A house buyer could also opt for an equity loan on the house he is selling and get up to 80 percent of the equity to make settlement and hold out longer for a higher price on the home being sold, Foster said.
Herbert Danick, a partner in Schick & Pepe Realty in Montgomery County, said that the uses of bridge and equity loans are almost synonymous. He agreed with Shafran and Foster that some purchasers who have their own houses to sell take the option of going the "guaranteed sale" route. This involves a committment from a broker to buy the original house if it is not sold before the seller goes to settlement on the next house.
The "buy-in" price for brokers is established when the listing is taken. "Most brokers would rather sell the house than take title, even at an agreed-on price less than the VA appraisal," he said.