Home sales in the Baltimore region can't sustain the level reached last month, when they jumped 35 percent over April 1995, according to real estate professionals, mortgage bankers and local economists.
Already, interest in buying -- strong during March and April -- has showed signs of waning as mortgage rates climbed more than a percentage point in less than three months, breaking the 8 percent barrier on 30-year, fixed loans.
"The interest rate, as much as we'd like to say it doesn't drive the market, has a big effect on people's ability to qualify" for a loan, said W. Armour Jenkins, senior loan officer for Signet Mortgage Corp., which had fewer phone calls in the last two weeks than during March and April. "Whether we can sustain that level of activity is a big question mark."
Nationally, rates had bottomed out in mid-February, dipping below 7 percent, according to a weekly survey by the Federal Home Loan Mortgage Corp., the federally chartered agency known as Freddie Mac. Rates on 30-year, fixed loans averaged 6.94 percent the week of Feb. 16, Freddie Mac said. Another survey by HSH Associates of Butler, N.J., showed rates in the Baltimore region hitting bottom the same week, at 7.16 percent.
"The unfortunate truth is, interest rates at that time were lower than they should have been," said Keith Gumbinger, an HSH vice president.
That occurred, he said, as bond traders predicted the economy would cool and policy-makers at the Federal Reserve would lower long-term interest rates.
"Unfortunately, that hasn't come to pass," he said. "The economy hasn't slowed. It has picked up since early March."
Rates have risen, for the most part, since then, spurred by strength in the economy that has triggered fears of rising inflation and higher rates at the hands of the Fed, said Robert Van Order, chief economist for Freddie Mac. Mortgage rates in the Baltimore region averaged 8.27 percent Friday.
Amid growing confidence in the economy, sales of previously owned and new homes soared last month to 1,514 from 1,123 during the same period a year ago.
"The most recent news on the economy -- jobs, income, personal spending, housing sales -- all are up and growing," Gumbinger said. "With the surge of growth comes the threat of inflation. The threat of inflation and the threat of overheating growth is what is keeping rates as high as they are now."
But such fears are unwarranted, said Michael Funk, assistant director of the Regional Economic Studies Institute at Towson State University. The U.S. economy can sustain its first-quarter gross domestic product growth of 2.8 percent without a significant inflationary push, he said.
"The bond market is overreacting and causing rates to go up," Funk said.
The housing market will likely feel the effects in the next few months. Economists called for slower sales in late summer and fall than in the spring -- when sales of previously owned homes jumped 35 percent in April and new home sales increased 5 percent from 1995's first quarter.
Already, the spread between the rates on 30-year, fixed loans and adjustable loans has begun to widen. Borrowers typically prefer fixed loans over adjustables, which carry lower rates but more risk because they can adjust upward after a period of time.
For instance, Freddie Mac showed rates on 30-year loans averaging 8.24 percent the week ending May 10, as compared to 5.8 percent for one-year adjustable loans.
At Towson-based Bi-Coastal Mortgage Co., the share of 30-year mortgages has dropped from 60 percent to about 40 percent, said Allan J. Gushue, president. Several varieties of adjustable loans account for the rest of the business, Gushue said.
"A lot of people didn't lock in, and rates went up a percentage point overnight," Gushue said. "We haven't seen a huge slowdown in demand for purchasing, though we would expect it if rates stay where they are."
Instead, many borrowers are getting lower rates by taking loans that adjust after one, three or seven years, he said.
Despite sharp rate increases, consumers shouldn't look for rates higher than 9 percent any time soon, amid expectations of slow enough economic growth to ward off rate increases by the Fed. In fact, economists say, rates could head in the opposite direction. "If the economy stays where it is, mortgage rates might slow down around 8 percent," said Van Order, who said it would take changes such as consistent reports of weak job growth for rates to dip below 8 percent again.
"The housing market right now needs stability," he said. Most consumers "would prefer lower than 8 [percent], but 8 percent is not bad, and if the economy is doing reasonably well and it's predictable, it makes it easier for everyone in the housing market."
Pub Date: 5/15/96