Any hopes that this spring and summer would bring improvements for buyers and sellers in the nation's residential real estate market have been ended by the Federal Reserve Board's sudden move to tighten interest rates.
The full economic impacts of the Fed's raising of the discount rate to 13 percent won't be felt for weeks. But here are the most like effects on real estate in the coming 90 days:
Interest rates on mortgages for new and resale homes are going back up fast, rather than continuing their slow slide downward from 1979's high point. In high-cos real estate markets with high consumer demand -- like Los Angeles, San Francisco and Washington -- rates should go to the 14 percent level, or beyond, within the month. In more normal markets, or those with soft demand for loans by buyers, rates should range from 13 1/4 to 13 3/4 percent.
Buyers searching for mortgage money in the early spring may find doors shut at banks, S&Ls and credit unions to all but depositors. They'll also find down payment requirements up, income and debt standards for granting loans to borrowers toughened, and more "points" being tacked on to their basic interest rate. (A "point" is equal to 1 percent of the principal amount of a loan, and is usually paid in cash to the lender at or before settlement. Lenders charge points to increase their effective return from a loan.)
Selers of homes -- particularlly those who have waited for the spring months to offer their properties at what is traditionally the best time of the year -- are in for disappointment. The evidence became clear in the final three months of 1979 that buyers balk at long-term 13 1/2 and 14 percent mortgage rates plus highly inflated housing sale prices.
The result this spring will be that if you want to sell, in a credit-crunched market, you'd better look very hard at the price you were planning to ask -- and seriously consider reducing it. In real estate, the availabiliy of financing pushes up market values; its absence brings them down.
"Creative finance" -- the art and science of selling homes without the participation of conventional lenders -- should return to the fore. People who need to buy or sell will turn to three-to five-year mortgages or deeds of trust from seller to buyer at below-market interest rates and low down payments.
Many major realty firms and their attorneys have boned up in the past six months on techniques such as "wrap-around" loans, contracts-for-deed, and secondary financing to assist buyers with assumptions of existing mortgages. These techniques may be able to save you thousands of dollars this spring.
Why should the Federal Reserve's Feb. 15 decision to raise its price of loans by 1 percent cause all this furor in the real estate market?
It is because almost no other commodity is more credit-sensitive in today's economy than housing. The Fed's move was aimed at pushing short-term borrowing rates upward, raising the costs of loans for businesses that want to buy inventory or finance short-term ventures.
Five years ago, such a pinch on short-term wouldn't produce a yelp from the home-loan market because mortgages were long-term financings, tied into the costs of long-term money. Virtually all of housing's credit came from low-cost passbook deposits at savings and loans and mutual savings banks.
In the inflationary economy of 1980, however, the thrift institutions that finance the bulk of the nation's housing are more directly plugged into events in the short-term money market. One third of the savings and loan deposit assets in the United States today are in the form of short-term high-interest-rate "money market certificates" -- a savings vehicle that only came into existence 20 months ago.
The rates thrift institutions have to pay on these certificates change weekly with the fits and starts of the short-term money market, and are certain to move up one or more points in the coming weeks.
S&Ls lost $3.7 billion in passbook withdrawals in January alone, but took in enough capital in money market certificates to post a $1.5 billion net gain for the month, according to industry estimates. With rates on each week's new money certificates going higher, and virtually all their lendable new mortgage dollars coming from this volatile source, S&Ls have only two choices: raise their mortgage rates or stop lending.
Many of them will probably do both in the next several weeks. That could mean a dismal spring for housing finance, on top of a dismal winter.
On the brighter side, there's one hope: If the Fed's action does indeed cool the pace of the economy, and begin to slow down inflaion, interest rates will start descending.
Dennis Jacobe, director of research for the U.S. League of Savings Associations in Chicago, thinks this could occur by the summer -- but he isn't taking bets yet.