Mortgage rates are at their lowest level in more than a year, causing a surge of interest in refinancing and a pickup in new loan business for lenders.
But consumers hoping for further rate drops are likely indulging in wishful thinking. Prospective buyers who have found the home they want to buy are advised to proceed with their purchase rather than try to catch the market at its lowest, experts said.
"Rates may go lower than they are now, but they're not going to go through the floor," said Mark Obrinsky, a senior economist with the Federal National Mortgage Association, known as Fannie Mae, the nation's largest secondary market buyer of home mortgages.
Long-term, fixed-rate mortgages are in the 9.5 percent to 9.75 percent range. Rates have been sliding for the past three months with occasional slight upward ticks interrupting the decline.
In the week ended Oct. 19, long-term rates were averaging 10.24 percent, according to survey records of the Federal Home Loan Mortgage Corporation, or Freddie Mac, also a major buyer of home loans in the secondary mortgage market. In the week ended May 5, the national average was 10.67 percent. And going back to the week ending March 24, 1989, the average rate was 11.22 percent.
Mr. Obrinsky predicts that home loan rates could drop as low as 9 percent by spring or summer. That scenario assumes a relatively quick resolution of the Persian Gulf war, the economist said.
Fears of inflation will move to the forefront this year because of the Middle East difficulties, which alone will prevent long-term interest rates from falling much below current levels of slightly more than 6 percent, Mr. Obrinsky said.
Disruption of Middle East oil supplies would drive up the cost of oil and quickly refuel inflation, he said.
"Everyone is aware of how quickly the situation can change," he said.
Robert Van Order, Freddie Mac's chief economist, concurred. Even if the economy sank below its current doldrums, he doubts long-term interest rates would fall much further because of underlying inflation fears.
Interest rates are key to housing affordability for most consumers. A 30-year fixed-rate, $85,000 home loan at 10.5 percent -- the national average rate for the week ended April 27 -- requires a monthly principal and interest payment of $777.75.
The same loan at 9.5 percent -- a rate widely available today -- requires a monthly principal and interest payment of $714.85, or $62.90 less.
At 9 percent, the monthly principal and interest payment would be $688.50, or $89.25 less a month than the same loan at 10.5 percent.
The National Association of Home Builders estimates that each percentage point increase in interest rates pushes more than 200,000 potential buyers of a median-priced new or existing home out of the market in the course of a year.