Rates likely to go down even further They're at lowest level in 20 years

March 07, 1993|By Joe Kilsheimer | Joe Kilsheimer,Orlando Sentinel

President Clinton's call for cutting the federal deficit has sent mortgage rates plunging again, and if Congress approves a "real deficit reduction," it could send them down even further, lenders and economists say.

The national average for 30-year, fixed-rate mortgages dropped to 7.65 percent as of Feb. 19, according to the Federal Home Loan Mortgage Corp., or Freddie Mac. It was the lowest rate since mortgages averaged 7.64 percent during the week that ended May 11, 1973, and it was the ninth decline in the past 10 weeks.

For homebuyers, it means that housing is more affordable now than it has been in 20 years. At 7.5 percent, a 30-year, $80,000 loan requires monthly principal and interest payments of $560. A year ago, when interest rates in the mid-8 percent range were considered low, a similar 8.5 percent loan carried monthly payments of $615.

Most experts predict that rates will continue falling, then will hold level for a while. Also, they said the climate for lower rates is favorable due to a variety of economic conditions.

John Tuccillo, chief economist for the National Association of Realtors, said he thinks prospects for mortgages in the 7 percent range are good for the rest of the year. He attributed the decline to Mr. Clinton's announced commitment to deficit reduction and the weak national economy.

"There's a mixture of optimism and guardedness about the economy. On the one hand, the market seems to feel pretty good about the prospects for deficit reduction, and on the other hand, the economy is still limping along. And that's putting downward pressure on interest rates," Mr. Tuccillo said.

"There's more room for rates to go down. I think you'll see rates float down to between 7 and 7.25 percent over the next three months, and then hold there for a while."

However, further declines in the initial rates for one-year adjustable-rate mortgages are unlikely, Mr. Tuccillo said.

The Federal Reserve Board has signaled that it wants to decrease its reliance on long-term bonds to finance the federal deficit and sell more short-term bonds and notes. That will hold ARMs at their current level; Freddie Mac's national average was 4.95 percent on Feb. 19.

Dick Imming, vice president of CTX Mortgage in Maitland, Fla., said Mr. Clinton's proposal to raise corporate income taxes may put indirect pressure on mortgage rates. If corporate taxes are raised, it may scare institutional investors away from the stock market and into other investments such as corporate bonds and mortgage pools. More institutional funds available to the mortgage market means lower interest rates, Mr. Imming said.

Tony Nunziata, vice president of American Heritage Mortgage in Altamonte Springs, Fla., said the fact that German and Japanese national banks have reduced interest rates also has had a dampening effect.

"I think worldwide you're seeing a lower interest-rate environment," Mr. Nunziata said. "And that bodes well for homebuyers."

At least one economist warned that the potential exists for rates to jump upward again.

"Right now, we're in a mode where the market is being driven by the political perception that Washington is finally going to produce a real deficit-reduction package," said Mark Obrinsky, senior economist at the Federal National Mortgage Association, or Fannie Mae.

"The prospect of deficit reduction is driving down long-term interest rates because investors believe the federal government isn't going to be borrowing as heavily as it has been to fund the federal deficit," Mr. Obrinsky said.

History has shown, however, that the mortgage market can reverse quickly when perceptions change, he added.

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