John Day and his family have gone house hunting for about two months now, just long enough for the rules to change.
When they started, single-family homes in the $230,000 range fell well within reach. But as the financial planner and his wife, Marlene, inspected more than a dozen houses, rising mortgage interest rates dogged them. As rates crept over the 9 percent mark in late October for the first time this year, the Days halted plans to move from their cramped Arbutus townhouse.
Now they wonder, how long should they wait?
"It's frustrating," said Mr. Day, a 36-year-old father of two, ages 10 and 12. "We don't know whether to accelerate the house hunting and get something before the rates hit double digits, or hang loose and wait six months. When rates went up, the house you thought you could afford, you can't afford. You have to downgrade your goal and start over again.
"Trying to figure it out is like standing on the white line in the middle of the road. You don't know which way to go, so you don't do anything."
Such decisions have confounded more than a few buyers as average interest rates on 30-year, fixed loans have climbed precipitously from a low of 6.83 percent in October 1993 to 9.11 percent a year later -- a jump of almost 2 1/2 percentage points. Even adjustable-rate mortgages, with low starting rates that offered some relief, have risen to the point of pricing many buyers out of the market, say agents who've had sales fall through.
Overall, rising rates have hurt home sales over the last several months. In June, July, August and September, pending home sales -- that is, contract signings -- have fallen 20 percent compared with the same month the previous year. In September, they dropped 27 percent.
In some cases, rising rates have spurred consumers to speed plans to buy a home, making for a busy October for some real estate offices.
While sales in the $110,000 to $180,000 range have stalled, David McIlvaine, an agent with ERA Caton Realty Co., found that lower-end and upper-end home sales picked up last month.
"It appears as though there has been a sense of urgency stirred in the buying public," Mr. McIlvaine said. Higher rates "have created an urge to move on. We're seeing the results of the buying public saying, 'They are what they are, let's go do what we have to do.' "
But a more frequently heard story is one of fewer home-showing appointments, fewer agents in the office as business has tapered off and sellers helping with closing costs to help clinch a sale. Average mortgage payments for homebuyers have risen by about $200 since this time last year. For example, monthly
payments on principal and interest for a typical Baltimore area house -- about $130,000 -- have jumped to $988 from $779, assuming a 30-year, fixed-rate loan of $120,000.
"The market is definitely off," said Henry A. Strohminger, an agent with The Prudential Preferred Properties, who reported a sales decrease of about 20 percent compared to this time last year. "It's a little bit of everything. Job security is hurting right now in a lot of areas in Baltimore. There's plenty of inventory, but people are staying put longer."
Richard Sawicki, an agent with Long & Foster in Towson, said the number of appointments to show homes he has listed has dropped from about three a week to one every two to three weeks. He and other agents are finding they must work harder for the serious buyer, steering them toward financing designed to help more people qualify for loans or negotiating deals with sellers.
"My last three sales have all been through creative financing, with seller contributions. Otherwise, it wouldn't have worked," he said. "It's taking longer to sell and if you really want to sell, people cooperate on both ends."
One young couple with only a couple thousand dollars for a down payment settled last week on their first home, for $102,000 in Cockeys
ville, after negotiating to have the seller pay some closing costs, said their agent, Patti Taylor of O'Conor, Piper & Flynn in Hunt Valley.
"We came in with a higher price and had the seller pay some points," Ms. Taylor said. "The seller still made the same amount of money."
Fierce competition for business has prompted lenders to relax income and credit requirements, lenders said. To better compete with FHA loans, conventional loan programs have become more lenient, in many cases requiring just 3 percent rather than the usual 5 percent down payment, said David Ginski, president of Agency Mortgage Corp.
"Conventional [programs] always had better rates and points, and now, since fewer people are qualifying and FHA is taking them away, they've reduced the qualifications," Mr. Ginski said. "This market is great for first-time buyers. All our lenders and investors want to stimulate the buyers market, so they have reduced requirements that used to be very rigid. We're seeing more people qualifying with the different types of products."
Baltimore firefighter Stephen Hersl had run up against one brick wall after another during months of house hunting. Renting in Highlandtown, saddled with poor credit because of a divorce, he said, "nobody wanted to work with me. They didn't want to work with that credit."
Now he hopes to buy a fixer-upper house in Rosedale, which had been taken over by the Department of Housing and Urban Development. Thanks to Agency Mortgage's efforts to get him a loan with lenient credit and down payment terms, he says, "I might have a chance."
Adjustable-rate mortgages, with lower starting rates than fixed mortgages, are popular, Mr. Ginski said.
"People are used to 7 and 8 percent rates and don't understand why you're offering 9 percent" for a fixed-rate loan, he said. Lenders, therefore, are pushing a variety of lower-rate adjustable loans but with starting rates fixed for up to 10 years.
Such options in financing are keeping the market from completely stalling, as it did in 1987, when rates on 30-year, fixed loans rose from 9.09 to 11.59 in seven months, said Keith T. Gumbinger, of HSH Associates, which tracks Baltimore region mortgage rates.