A sudden spurt in the cost of money has just hit home buyers across the country, and it could signal the end of the six-month rate slide that consumers have grown accustomed to.
You may not have noticed the interest-rate jump during the past two weeks. It only amounted to about one-half of a percentage point on the cost of a typical, conventional fixed-rate mortgage. That's barely $30 a month in higher principal and interest payments on a $75,000 new deed of trust, or $360 in higher payments for the first year. Taken alone, the half-point increase probably won't disqualify or discourage many buyers who are seriously determined to get into a new house.
But there's more to the change in rate patterns than just $30 a month.
It illustrates what some top corporate economists on Wall Street and in Washington have been warning about since late 1982: With the U.S. Treasury scheduled to borrow a staggering $170 billion in the capital markets this year to finance the federal deficit, and an economic recovery now clearly under way, there's a distinct chance that the cost of money will rise, not fall.
During the first week in February alone, the Treasury plunged into the market for nearly $15 billion. Congress, meanwhile, made unconvincing political noises about controlling deficits in the so-called "out years"--like faraway 1985 through 1990.
"That makes investors very nervous--it feeds their latent paranoia complexes about future inflation and uncontrollable federal spending," says the chief economist for a large Wall Street investment-banking firm. "They're skittish."
Rational or irrational, market fears like that can make money rates go up--like the recent blip--and possibly even stay up.
Economists such as Norman Robertson, senior vice president of Pittsburgh's Mellon Bank, focus less on market psychology than on the pace of the nation's overall economic recovery.
He sees the economy "getting off to quite a fast start" this year, heading into recovery. If big Treasury borrowings bump headlong into rising private-sector demands for capital to expand output, watch out, says Robertson. Rates could move up as 1983 progresses and carry on at uncomfortable levels into 1984, in his opinion.
Not all economists, of course, agree with that scenario. But many agree that rates aren't likely to fall much below where they are right now. Analysts such as Tim Howard, chief economist for the Federal National Mortgage Association , think "is probably overreacting" to its deficit fears and the early signs of economic recovery.
He thinks rates still will go up by another one-quarter to one-half a percentage point during the current "blip," but then are likely to fall back to the levels they'd been in January. Howard has concerns about the ballooning deficits, but he doesn't think the national economic recovery will proceed so fast that the Treasury will begin "crowding out" private borrowers--thereby pushing rates up--during the next six months.
Kent Colton, executive vice president at Fannie Mae's sister institution in Washington, the Federal Home Loan Mortgage Corp., has much the same forecast.
But ask either Colton or Howard how all this translates for prospective home buyers, and they sound remarkably like the worrisome Wall Streeters. Their message is: Lock up money sooner rather than later if you plan to buy this year. Waiting won't save you much--and conceivably could cost you.
"There's really no point in postponing a refinancing, a second mortgage or a new first mortgage on a house," says Colton.
"Rates aren't going much lower, at least for the foreseeable future. I personally wouldn't put off a sale or a purchase that I needed to make, simply in the hope of catching a lower loan rate."
That's not real-estate-agent or home-builder hype, by the way. Both Colton's and Howard's rate projections are what their multi-billion-dollar institutions follow in planning their own purchases in the mortgage market.