IF YOU'RE LOOKING for the bottom of the interest rate cycle to time your next mortgage application, don't wait for 1997. Rates look to be higher in the new year.
That's the word from David A. Lereah, chief economist of the Mortgage Bankers Association of America, and Lyle E. Gramley, a former Federal Reserve Board governor and a consulting economist to the same trade group. They predict an 8.3 percent average mortgage rate for a 30-year fixed-rate loan. That's up from the 7.9 percent prevailing nationally this month, and represents a significant increase over the 7 percent of early 1996.
Even a moderate rise in the cost of money can have widespread ripple effects. Next year, according to the two economists, new single-family home construction starts are likely to drop by 7.3 percent, and new home sales by 4.4 percent.
Sales of existing houses are likely to drop by 4.2 percent, and the average appreciation rate in resale values of homes nationally is expected to drop to 2.3 percent from this year's 5.6 percent.
The cause of all this impending softness? An expansion in the U.S. domestic economy slightly more robust than optimal, according to Lereah and Gramley. That means more jobs, lower unemployment and higher wages than the system can handle without triggering an increase in the rate of inflation.
So what does a 1997 forecast like this mean for you as a homebuyer or refinancer? For starters, don't even try to play the "time-the-low-point" game in the interest rate cycle. Even sophisticated traders of billions of dollars of bonds concede that it's a tough game to win. And for buyers of new homes, it may not even be all that relevant. That's because many builders are willing to assume the risk of moderate jumps in rates and provide FTC buyers with loan packages that subsidize the interest rate.
Rates in the overall mortgage market might rise by one-half percent in the first six months of 1997, in other words, but competitive builders are likely to shield you as a would-be purchaser from that change by offering "buy-down" financing through their own subsidiaries or cooperating mortgage lenders.
A second consideration, especially for move-up sellers and refinancers: Higher fixed rates should motivate you to look to alternative types of loans. For example, in 1997, adjustable-rate 30-year loans are likely to be more attractively priced than in either of the two previous years.
Adjustables tied to one-year Treasury notes are likely to hover just over 6 percent, versus 30-year fixed rates of 8 1/4 to 8 1/2 percent.
Another form of adjustable that cuts your effective rate and protects you against sudden payment increases: Loans that adjust just once during their term -- either five years out or seven years out -- and then turn into fixed-rate mortgages. They are typically one-quarter to one-half percent below standard 30-year fixed-rate quotes.
Pub Date: 11/10/96