THE calendar on mortgage interest rates has been turned back to 1977, but would-be homebuyers aren't going along for the time trip.The average rate available for fixed-rate mortgages was 8.95 percent in the latest weekly national survey of 125 lenders conducted by the Federal Home Loan Mortgage Corporation. That's the lowest since November 1977. The current average for adjustable-rate mortgages is 6.83 percent, the lowest since the FHLMC, also called "Freddie Mac," began tracking adjustable rates in 1984. Yet in August, sales of existing homes fell overall for the second straight month, as gains in the South and Midwest were more than offset by declines in the West and Northeast. Sales of new homes also fell in August. Frank Nothaft, deputy chief economist at FHLMC, points out that mortgage rates have fallen "a really significant" three-quarters of a percentage point in the past two months. He says that August was too soon to look for the rates to be reflected in higher home sales, and that this month's data will show the impact.
Reluctant buyers Still, consumer confidence plunged this month for the third straight decline, according to the Conference Board. "Buying a house is an extremely critical investment, the largest most people will ever make," says Tom Holloway, senior economist at the Mortgage Bankers Association of America. "They are reluctant to make that commitment when the economy is limping along." Euphoria following the end of the Gulf war led to a surge in homebuying as consumers expected the economy to shift back into high gear. It didn't, undermining their enthusiasm, Holloway says. "The missing ingredient is job growth." Economists say the recession started in July 1990. Revised statistics show national output still declining at a 0.5 percent annual rate in the second quarter of this year. A feeble recovery has begun by now, most economists say, but an actual date for the turnaround remains uncertain. With that in mind, the Federal Reserve is expected to maintain the availability of credit to banks or even ease interest rates further, especially with inflation falling. The core rate of inflation, which is the consumer price index excluding volatile food and energy prices, is dropping toward 4 percent, says Norman Fieleke, an economist with the Federal Reserve Bank of Boston. "That's all known and incorporated into rates," Holloway says, arguing that mortgage interest rates won't get much lower - or higher. The outlook is "relatively flat," adds Richard Peterson, chief economist at Continental Bank in Chicago. Mr. Nothaft agrees that "the most likely scenario" is for rates to hold firm for at least two months. Others say six months.
Refinancing increases However, people contemplating a home purchase "shouldn't wait," Nothaft advises. Another three-quarter percentage point decline in interest rates is "extremely unlikely." Some people aren't waiting; these are current homeowners wanting to refinance existing mortgages at current lower rates. "They're jumping in," says Holloway, noting that one-third of all current mortgage applications are for refinancing, compared to 10 to 15 percent normally. Because there are costs associated with refinancing, Mr. Peterson says it only makes sense if the spread between interest rates is 2 percentage points or more and if the owner intends to keep the home for at least three years. Peterson cites as an example a homeowner with a $100,000 balance on a mortgage carrying a 10.5 percent interest rate. Suppose the homeowner takes out a mortgage having an interest rate of 8.5 percent but requiring an upfront fee (called points) equal to 3 percent of the loan. The lower rate will save the homeowner $2,000 per year, but he will need more than a year to recover his refinancing costs. It's a lot more difficult to calculate the value of refinancing an adjustable-rate mortgage, Peterson says, because the interest rates on them have fallen along with other rates. But if a homeowner now paying 7.5 percent can afford to pay 8.5 percent but not 9.5 percent, he may prefer to refinance with an 8.5 percent fixed-rate mortgage to protect himself against future rises.