As rates rise, home market picks up

February 13, 1994|By Ellen James Martin | Ellen James Martin,Sun Staff Writer

Have rates hit bottom? The Federal Reserve seems to be trying to convince us that they have.

With the Fed moving to raise short-term rates, many consumers have lost faith that mortgage rates will stay at current levels, which are close to 20-year lows. As a result, phones are ringing at lenders' offices and many prospective buyers are pushing ahead plans for home purchases.

"The threat of rate volatility is waking up the market," said Paul Havemann, a vice president with HSH Associates of Butler, N.J., which tracks mortgage rates for consumers.

"The sense of security that mortgage rates will stay at these generational lows has now been shaken," he said.

In Baltimore, rates for 30-year fixed mortgages last week averaged 7.24 percent, up almost a quarter-point from 7.01 percent the previous week, according to HSH.

According to the Federal Home Loan Mortgage Corp., the national average rate for a 30-year fixed-rate mortgage on Thursday was 7.29 percent, up from 7.08 percent the previous Thursday -- the day before Fed Chairman Alan Greenspan announced that the central bank would increase short-term rates for the first time in five years.

Fearing inflation, the Fed pushed up the federal funds rate -- interest banks charge each other for overnight loans. The rate rose one-quarter of a percentage point to a target of 3.25 percent.

By Wednesday, mortgage rates had moderated, But real estate specialists said home buyers remained worried.

"The psychology is to take advantage of the market, because of the uncertainty that rates will be higher next week or next month. It does create a sense of urgency," said Mark Goldberg, an agent for Prudential Preferred Properties in Bethesda.

"Many more fence sitters will get off the fence," predicted Patrick Cusack, a loan officer with PNC Mortgage Corp. in Lutherville. "I think we're going to have a good spring."

The snow, ice and sleet so abundant in January and early February combined to keep many would-be buyers out of the market during this period, Mr. Cusack said.

The Greater Baltimore Board of Realtors reported that sales in tTC the metropolitan area rose 5 percent, but that pending sales -- the number of homes newly under contract -- fell 11 percent.

But despite the poor January activity, gyrating mortgage rates are prompting many to re-enter the market.

"People are calling to get prequalified. I'm just starting to see a lot of activity," Mr. Cusack said.

The demand for adjustable rate mortgages is expected to fall in coming months, since these loans more closely track short-term rates. In addition, the people who are rushing to buy a home before mortgage rates rise further are more likely to want to lock in a low rate -- with a fixed rate.

"We're still in a fixed-rate market. I don't see a lot of people asking for ARMs. The rates are still low enough for them to go with a fixed-rate," Mr. Cusack said.

The exceptions are those whose plans call for staying in a home for only a few years, Mr. Cusack said. A couple buying a townhouse as their first home, for example, may opt for an ARM because they plan to remain in the house just three to five years before moving to a larger detached property.

Some short-timers are trying to get the best of both worlds through a hybrid loan that offers a below-market fixed-rate in the first five to seven years and then offers the chance to convert to an adjustable rate loan.

Last week's mortgage rate jump may put a dent in the refinance market. Although a few stragglers with high-rate loans are still applying, the small rise in rates stops those people who have refinanced already from refinancing again.

"There's a growing consensus that 'refis' are dead," said Mr. Havemann, of HSH Associates.

But, in the short term, the sudden rise in rates may push many people with ARMs -- who may be fearful of further increases -- to refinance into fixed-rate loans to lock in today's rate.

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