The downward slide that has brought mortgage interest rates down by perhaps a full percentage point over the past six weeks, catching homebuilders and buyers alike by surprise, has about reached bottom, say housing economists.
The good news is, however, that the rates probably will stay in the 11 3/4 percent to 12 1/2 percent range in most areas of the country until the end of the year, they predict. And several economists say a drop of another half a percentage point is possible in coming weeks, with the weak economy and low inflation holding down rates for the immediate future.
"Mortgage rates in the next couple of months should drift down with 30-year loans at 11 1/2 percent and 15-year loans close to 11 percent," said Kevin Villani, senior vice president at the Federal Home Loan Mortgage Corp. "The reason is that rates are virtually already down to those levels in the capital markets, and that's where lenders are selling their loans."
Signs of strengthening in the economy may mean that interest rates are as low as they are going to go, according to Warren Lasko, executive vice president of the Mortgage Bankers Association of America. Estimates of economic growth for the second quarter of 1985 indicate "some improvement. There seems to be a little strength in consumer sales. I don't think the economy is as weak as the first quarter indicated," he said.
The low rates will keep housing sales at the brisk level experienced in recent weeks, lead homeowners with high-interest-rate loans to refinance, and boost demand for fixed-rate mortgages as buyers try to lock in the low interest, several industry experts said.
But expectations of a continued weak economy and the prospect of a tax bill containing major changes affecting real estate will forestall a housing boom.
Housing sales are "okay . . . but they're not gangbusters," said Kent Colton, executive vice president of the National Association of Home Builders. The uncertainty over what kind of tax legislation will emerge from Congress "makes it difficult to predict" whether rates will remain low over the long term, he said.
The rates are coming down because of "perceived weakness in the economy, and that means the Federal Reserve is pouring money in . . . . But inflationary pressures still exist, and over the longer haul they are worse than they were a year ago," Villani said.
The tax bill now being debated in Congress will result in federal deficits in the range of $175 million in future years, yet the battle continues over the state and local tax deductions, he said. Unless the deductions are eliminated there will be no real tax reform, but without them far fewer people will be able to buy homes, Villani believes.
For most of this year, however, business has been brisk. New-home sales in the first quarter of 1985 were 7.3 percent higher than during the first three months of 1984, while existing-home sales rose 5.8 percent and housing starts were up 12.2 percent, according to the Federal National Mortgage Association (Fannie Mae). Home construction starts dropped 14 percent from April to May, probably reflecting builder caution in the face of an interest rate increase of about 1 percentage point in March before the present downward movement began, said Mark J. Riedy, president and chief operating officer of Fannie Mae. Housing starts for all of 1985 probably will be 25 percent higher than in 1984, he said.
Home loan originations also will be up by about 25 percent, because of higher sales and an expected increase in refinancings by homeowners, Riedy said.
Lasko said the sharp drop in interest rates over the last six weeks "will bring about a tide in refinancings," and bankers already are receiving an increase in the number of inquiries from homeowners. Any homeowner with a mortgage at 14 percent or more could bring down his mortgage payments significantly by refinancing, he said.
Judging from activity in the secondary market, where lenders sell mortgages and mortgage-backed securities to investors, "about 30 percent of the loans now being made are refinancings," said Villani. "We're just about at the stage where people who refinanced" during periods of lower interest rates in the past couple of years could benefit from refinancing again.
The generally accepted level at which a homeowner can save money by refinancing is at interest rates 2 percentage points lower than the rate on the mortgage he holds. Villani said he believes a 1 1/2 point spread could save money for the holder of a 30-year fixed-rate loan.
Lower rates also are bringing about a shift in demand from adjustable-rate mortgages (ARMs) to fixed-rate loans. In June 1984, ARMs accounted for 65 percent of all conventional loans -- those which are not FHA and Veterans Administration-insured, according to Fannie Mae statistics. By last month that level had dropped to 53 percent. When the VA and FHA loans are included, the fixed-rate share of loans goes even higher, because nearly all government-insured loans are at fixed interest rates.
"I think the consumer basically prefers a fixed-rate mortgage," said Lasko. A home buyer who took out an ARM a year or two ago probably has an 11 or 12 percent interest rate and could get the same interest in a fixed-rate mortgage now, he said.
A significant portion of the refinancings are from adjustable-rate mortgages into fixed-rate 30-year and 15-year loans, said several economists.
"It's good for our industry to see refinancing into fixed-rate loans" because mortgage bankers make fixed-rate loans and sell them to investors, said Lasko. "ARMs are made primarily by savings and loans and savings banks, and they will be hard-pressed to keep the ARMs coming in" while interest rates are low, he said.
There is a growing preference among consumers for 15-year mortgages, which can be obtained at rates from a half to three-quarters of a percentage point lower than those for fixed-rate loans, said Riedy. The major advantage is that a borrower can cut his interest payments by half or more over the life of the loan, he said. About 17 percent of the home loans made so far this year are for 15 years, he added.