If you're a potential home buyer, seller or refinancer this spring and are beginning to bite your nails about mortgage rates, take the advice of prominent economists: Cool it. Don't overreact to headlines about rising interest rates. And don't rush into the wrong loan from the wrong lender simply to save a theoretical one-half percentage point on your mortgage.
That's the consensus that emerges from discussions with a panel of housing and Wall Street economists who watch movements in the marketplace like hawks. The economists make no bones about the facts. Yes, they say, there has been upward pressure on interest rates since January for three key reasons:
The economy has been more vigorous than the federal government thought it would be. That faster growth, in turn, has raised demand for capital in some sectors, putting a strain on rates. The Federal Reserve Board, the nation's chief inflation sentry, has been edgy about excessive expansion of the money supply. If the expansion gets out of hand, the Fed could be forced to tighten the screws on credit availability by raising borrowing rates. The federal budget deficit is gargantuan and getting worse. The government's continued massive presence in the capital market -- gobbling up funds that otherwise could go to private borrowers -- is the most important force keeping interest rates high. Every perceived delay by Congress and the White House in cutting the $200-billion-plus annual deficit makes the rate outlook for 1985 and 1986 less hopeful.
Take these three facts seriously, the economists say, but don't let them steer you to wrong conclusions. Don't let them turn you into a mortgage-market Chicken Little.
"I'd be very wary about rushing into any home loan in the next few weeks purely on the basis of beating the big increase over the horizon," said David Wyss, a financial economist for Data Resources Inc., a national consulting firm based in Lexington, Mass.
Virtually all the rate movements of the past six weeks that have generated the headlines making consumers nervous have been in the short-term capital market, not the long-term market most significant for housing, Wyss pointed out.
Short-term rates, like three-month, six-month and one-year Treasury bills, have been highly volatile since the beginning of 1985. One-year Treasuries went for 8.4 percent and jumped to 9.2 percent by mid-March. Although many home buyers and sellers often assume that interest rates move up across the board, the mortgage market has been an island of comparative stability in 1985, Wyss observed.
Some lenders have raised their quotes on one-year adjustables by a notch the past two weeks, James Christian, chief economist for the U.S. League of Savings Institutions, conceded. But "by and large, all the shouting about rates has been outside the mortgage market, not in it," he said.
What about the coming three months? What's likely to keep mortgage rates in roughly the same narrow band they've been in since late December? (That is, 12 3/4 to 13 1/4 percent for fixed-rate loans with 10 to 20 percent down payments; 10 1/2 to 12 percent for one- to three-year adjustables.)
Economists cite several key brakes to any rapid upward escalation in mortgage money costs:
The Fed is highly motivated to keep interest rates down for the time being. Any sharp rise in rates could send the dollar to record highs against foreign currencies, a result the Fed and Treasury Department passionately want to avoid. The underlying rate of inflation, a vital component in the price charged for capital in a free marketplace, remains encouragingly low. So long as institutional money managers see inflation continuing in the 3 1/2 to 4 percent range, they will have one less reason to raise the price they need for their dollars. Thrift institutions, a major provider of mortgage money, are better insulated against sharp cost-of-funds increases this year than in the past because larger chunks of their funds are in longer-term maturities than two years ago. That allows them to keep their mortgage rates stable even when other, shorter-term sectors are moving up.
What does all this mean in practical terms for you as a buyer or seller? In three words it means: Don't be stampeded, not by realty brokers, builders or lenders who warn of big rate jumps in the immediate weeks ahead. No one can say for certain what's over the hill. But some economists with good forecasting records say it's not likely to be all that terrifying.