The decline of the dollar is not expected to drive up mortgage interest rates for American home buyers in the immediate future, but could bring higher rates next year if the federal budget deficits remain high, housing economists say.
Finance ministers of the United States, West Germany, Britain, Japan and France, concerned over the growing U.S. trade deficit, agreed last month to coordinate efforts to push the dollar down.
How quickly or how far the dollar will decline is difficult to predict, the economists say, but most agree that a devalued dollar eventually will have a significant impact on the health of the housing industry.
"Between now and one year from now, we will see interest rates remain stable," said Lyle Gramley, chief economist for the Mortgage Bankers Association of America, which met here this week. "Beyond a year from now, however, interest rates may well go up."
Economists also are predicting that the decline of the dollar could trigger a return of inflation, which, if paired with higher interest rates, could force an even greater number of moderate-income families out of the housing market.
Gramley, a former governor of the Federal Reserve Board and one of the featured speakers at the MBA convention here, warned mortgage lenders that a return of inflation could be a "disaster" for housing.
"If the dollar's value continues to fall over the next year as fast as it has since February, the stage will be set for a marked turnaround in trade flows and a strengthening of economic expansion by early 1987," Gramley said. "The rate of inflation might turn up soon thereafter."
The economists say their primary concern is that European and other foreigners and institutions who have been investing heavily in the United States during the past few years will take their money elsewhere as the declining dollar makes American investments less attractive.
"We've been living high off the hog because we've been borrowing other people's money, particularly European money," said Dean Crist, a research economist with the National Association of Home Builders. "If the dollar comes down too quickly and the foreign investors pull their money out of American markets while we continue to have the large federal budget deficit, that could be very bad for housing."
"If a pronounced decline in international capital inflows occurs while federal budget deficits are in the $200-billion-plus range, the pressures on mortgage interest rates will be enormous," Gramley said. "Pushing them up still further with a brutally tight monetary policy would do incalculable damage to financial markets and credit-sensitive sectors of the economy. Real estate finance and the construction industry would be particularly vulnerable."
Kevin Villani, chief economist for the Federal Home Loan Mortgage Corp., which also is known as Freddie Mac, said that his company already has begun to reconsider its plans for selling bonds in Europe this fall.
Freddie Mac, along with the Federal National Mortgage Association and other companies, borrows money on U.S. and international markets to finance the purchase of home mortgages from lending institutions. These secondary-mortgage-market companies then pool the mortgages and issue mortgage-backed securities to investors, thereby raising more capital to purchase more loans.
Villani said that development of the secondary-mortgage markets has been instrumental in funneling capital from all parts of the world into the American housing market and that a decline of the dollar could make it more difficult for the secondary-mortgage-market companies to borrow abroad.
"The decline of the dollar had an immediate impact on our financing plans, and until those things stabilize, they will throw some cold water on our European financing," Villani said. "It affects our ability to go abroad and get more attractive financing rates than we can get here in the United States."
Villani said that he is not just concerned about the loss of European investments in housing, but also is concerned that such a trend would tighten all the capital markets, making it more difficult for American home buyers to find a lender with the funds to finance their home purchases.
Gramley said the purpose of forcing the dollar down is to make American goods more competitive in international markets. As they become competitive, the reversal in trade flow should begin to stimulate the economy.
"There has been a good bit of public discussion about how difficult it would be to finance the present huge federal budget deficit if capital inflows from abroad shrank substantially," Gramley said. "Under those circumstances, extremely strong pressures on interest rates would develop with adverse results on housing and other credit-sensitive sectors of the economy."
Gramley said, however, that he does not necessarily welcome increased growth if it is paired with continued large federal budget deficits.
Leaders of other industrial nations whose currencies have depreciated against the dollar over the past five years have been able to hold inflation down with strict monetary policies. For some of the countries of Western Europe, however, the result has been extremely high unemployment, Gramley said.
Along with the leadership of the MBA, Gramley called for a serious reduction in the federal budget deficit as the only way to prevent problems for housing as a result of the decline in the dollar.
"Unless we take steps as a nation to cut the red ink, we can expect federal borrowing to apply strong upward pressure on interest rates," said Robert J. Spiller, outgoing president of the MBA.
Housing industry analysts say that consumers have begun to adjust their purchasing patterns for a low inflationary economic environment and that a surge in inflation next year could catch some consumers by surprise.
"People are no longer trying to borrow for as long as possible, but seem more intersted in building up equity faster and getting their payments done with," said Leland Brendsel, acting director of Freddie Mac.
Freddie Mac said it has purchased nearly $5 billlion worth of 15-year mortgages this year, which is up significantly from last year. Freddie Mac also has purchased $10 billion worth of 30-year mortgages this year.
And the MBA has reported growing interest in the biweekly mortgage, which requires the home buyer to make two payments a month instead of one. As with a 15-year mortgage, equity builds more quickly and the home buyer saves money because the interest for the entire loan is substantially lower than it would be if paid back once a month over 30 years.
Despite the prediction of a surge in inflation, housing economists caution home buyers against building into their home-purchasing plans the expectation of higher inflation.
"If it happens, it will be a bonanza for some, but they shouldn't bank on it because it is hard to predict what will happen and when," Villani said. "For some borrowers, it will mean a return to mortgages like graduated-payment mortgages and other instruments devised in the days of inflation when rising housing values made it difficult for some people to afford a home at all."