Mortgage interest rates may have reached the end of the decline that started more than 18 months ago and could begin to move up slightly later this year, housing economists say.
Despite an expected rise in rates after mid-year, however, housing industry officials believe 1986 will be a good year, and are predicting that home sales and starts of new housing construction will continue to be strong through the year.
"1986 should be a very good year for housing," Lyle Gramley, chief economist of the Mortgage Bankers Association of America, said at a meeting of mortgage bankers in New York last week. "With a drop in interest rates over the past two months of between 1 1/4 and 1 1/2 percent, that has to be good for housing."
Industry officials said, however, that continued uncertainty over some aspects of the tax reform measures moving through Congress and the federal deficit reduction law known as Gramm-Rudman-Hollings could weaken some sectors of the housing industry, despite the prediction that rates will stay fairly low through the first half of the year.
"We are about 90 to 95 percent through the reduction in interest rates," said Leonard J. Santow, managing director of Griggs and Santow, a New York consulting firm. "The bottom of the rate swing will be now, in the first quarter of 1986, with maybe a quarter to half percentage point of reduction left. While we expect rates to ease back up, we do not expect any big jumps in rates during the last three quarters of the year."
Santow said he predicted mortgage interest rates would be about 1 percent higher at the end of 1986 than at the end of last year.
Gramley agreed with Santow, saying that uncertainty over the federal budget could create some volatility in interest rates later in the year.
"If Gramm-Rudman is repealed, or declared unconstitutional or revised, all of which are possible, interest rates would have to go up in response," Gramley said.
The MBA said that interest rates probably will range from 11 to 11 1/2 percent for fixed-rate mortgages for the first half of the year, and that first-year rates on adjustable-rate mortgages that can be adjusted each year will range between 9 and 10 percent.
The MBA also predicted that the volume of mortgage lending, fueled by people refinancing older mortgages, will continue to be strong into early 1986.
Timothy Howard, chief economist for the Federal National Mortgage Association, the federally chartered secondary mortgage company, said that mortgage loan originations in the United States were up 15 percent in 1985 over 1984 and could be expected to increase another 10 percent in 1986.
Howard also predicted that sales of new homes would increase this year, from 680,000 in 1985 to 750,000 in 1986. Sales of existing houses also should be up, Howard said, from 3.1 million last year to 3.4 million this year. Howard also predicted starts of new housing would increase from 1.7 million for 1985 to 1.75 million in 1986.
The National Association of Home Builders, however, is slightly more cautious about housing starts for this year, predicting only 1.6 million.
Michael Sumichrast, chief economist for the NAHB, said that with consumer income rising slowly and housing appreciation also slowed by the low level of inflation, consumers have little incentive to sell their houses and buy new ones. Sumichrast also said that starts of new multifamily units under construction will drop next year because of concern about a part of the tax reform proposal that would curtail the amount of tax-exempt bond financing available for multifamily projects.
Some housing economists say, however, that tax reform is seen now as less of a threat to housing and that it could become a moot issue if Congress makes deficit reduction a priority in the upcoming months.
"Chances for tax reform are between slim and anorexic," said Robert Dietrich, executive vice president and chief economist of The Northern Trust Co. of Chicago. "Even if it is passed, there will still be plenty of room for tax reform in the future."
While the home builders are cautious about housing starts, they are more optimistic about interest rates, predicting a possible drop of three-fourths of a percentage point during the year.