Mortgage interest rates, which were particularly volatile this spring, are expected to drop back below 10 percent within the next four to six weeks, economists say, in reaction to disappointing June economic figures.
If the economy continues to do poorly through the summer, home buyers can expect rates to stay slightly below 10 percent through the end of the year. If the economy perks up, rates probably will return to about 10 1/2 percent by the end of the year. The average interest on a 30-year fixed-rate loan in the Washington area is currently 10 1/4 percent.
"There's a reasonably high amount of uncertainty about what will happen to rates in August," said Timothy Howard, chief economist for the Federal National Mortgage Association, a federally chartered corporation that buys mortgages from lenders and resells them in the secondary market. "Mortgage rates are expected to edge lower in the next few weeks, but that depends on what the Federal Reserve Board decides to do."
Mortgage rates surprised most economists by falling to a seven-year low of 9 1/2 percent in April, triggered primarily by the demise of the Organization of Petroleum Exporting Countries and falling oil prices.
That drop in interest rates sparked a landslide of demand for mortgage credit -- primarily from families refinancing loans taken out when rates were above 12 percent -- that has swamped mortgage lenders and created a two-month backlog in loan processing.
The heavy demand combined with other economic factors to push mortgage rates back up a full percentage point during May, slowing down the rush for loans.
Economists had been predicting a rebound in the economy during the second half of 1986, which would have kept mortgage rates at 10 1/2 percent or higher, but the June economic indicators -- particularly the low figures for employment and business investment -- have dampened those hopes. Now many economists are predicting that the Federal Reserve will move to lower interest rates slightly sometime in the next two weeks, in reaction to the signs of weakness in the economy. Such a move could bring mortgage rates back down to about 9 3/4 percent, economists say.
"The economy is not showing the signs of near-term improvement that we had hoped for," said Lyle Gramley, chief economist for the Mortgage Bankers Association of America. "Because of that, I would expect interest rates to edge down further. We have a clear shot at single-digit mortgage rates again, and I see nothing between now and 1987 that will bring a significant run-up in rates."
Many economists now are predicting relatively slow growth through the rest of the year and interest rates that should hover around the 10 percent mark or slightly lower.
"I'm predicting rates may go down about a quarter to a half of a percentage point in the near term," said Michael Lea, chief economist for the Federal Home Loan Mortgage Corp., the quasifederal agency that purchases mortgage loans for resale into the secondary mortgage market. "The economy is just not responding to the stimuli as people thought it would."
Even if there is some recovery in the economy this fall, economists say, mortgage rates are not expected to rise as fast as other interest rates because mortgage rates have been artificially inflated by the tremendous demand for loans.
"When a lender is up to his ears in refinancing he has no incentive to lower rates," Howard said. "Once the backlog gets processed, however, that incentive will return and mortgage lenders will become more competitive again, keeping rates down."
Mortgage rates have been watched with unusual interest this summer, as thousands of people waiting for their loans to be processed fret over whether rates will go up by the time their loan commitments expire.
With rates headed back down, lenders predict that problems with lapsed commitments will tail off as borrowers find they can get just as good rates today as when they applied for loans in March or April.
"I expect that this problem is going to disappear in a few weeks," said Warren Lasko, executive vice president of the Mortgage Bankers Association. "Rates are halfway back to where they were in April, and I think we will be back to single-digit rates in a few more weeks."