Area's home mortgage rates take upward jolt, threatening slow recovery

April 06, 1994|By John E. Woodruff | John E. Woodruff,Sun Staff Writer

Baltimore-area home mortgage rates reached their highest level in almost two years yesterday, hurting consumers' ability to buy houses and surging perilously close to a range that could threaten Maryland's already fragile economic recovery.

In just the past four days, the average area rate for a 30-year loan jumped a "completely crazy" 0.37 percentage points, to 8.50 percent yesterday, said Paul Havemann of HSH Associates, a firm that tracks mortgage rates nationally. That rate was last seen here in June 1992.

The surge, part of the same powerful national interest rate jumps that began to rip through stock and bond markets last week, comes on top of more than seven months of far more gradual increases that had already pushed this region's mortgage rates from under 7 percent in August to over 8 percent by last week.

The changes are substantial enough to make a difference.

To the buyer of a $115,000 house -- the region's median price -- with a $100,000 mortgage, yesterday's 8.5 percent rate for a 30-year loan means monthly payments of $769 -- or $120 a month more than the same loan would have cost in August, when Baltimore's average mortgage rate was 6.75 percent.

It also means that the buyer who was qualified to buy a house costing up to $100,000 in August is now qualified to buy a house costing no more than $86,000.

Those new realities mean in turn that Maryland's recovery now has room for only "a slight rise" in mortgage rates before "they could have a very serious impact on the modest growth that has been getting under way in residential construction," said Michael A. Funk, deputy director of the University of Baltimore's regional economic studies program.

Continued weakness in new home sales would in turn act as a drag on the state's struggling recovery, not only by prolonging the extensive unemployment among construction workers but also by holding back sales of furniture, garden supplies and other goods that follow a new home purchase.

"If there's one word to describe a day like today, it's 'Aaaargh!' " said Mr. Havemann of HSH Associates.

In addition to the interest rate increase, Mr. Havemann said, a Baltimore borrower will now face an average of 2.09 percent of the loan amount in "points," or up-front money, to pay to the lender at closing. Last Wednesday, it was 1.42 points.

Mr. Havemann described the four-day surge in rates as "lacking any foundation in reality or even in today's news." He said it was so "overdone" that it seemed likely to ease at least slightly in the next few days but cautioned that more mortgage rate increases could occur in the next few months.

In Maryland's spotty recovery, new housing has been the one ray of hope to a construction industry that is still mired in recession due to a stock of unsold and unrented commercial and industrial properties left over from the late 1980s. Some builders began to build speculative houses again last fall, a trend that resumed last month after an interruption during a bad winter.

Real estate agents also reported big sales in March. "We broke our firm's all-time record for any month, and broke it by a full 13 percent," said James O'Conor of O'Conor, Piper & Flynn.

That surge, Mr. O'Conor said, resulted from so many buyers who had been unable to shop during January and February and fears that interest rates might increase.

The question now is whether the new jump in rates will scare additional fence-sitters into the market or scare some out of it altogether.

Many area builders and real estate agents have said they would not worry about a squeeze until 30-year mortgages hit 9 percent.

The increase "already affects the price and size of house that a person can afford, and that in turn sometimes affects a person's decision whether to buy," said Douglas Moore, vice president of the Maryland Association of Home Builders.

"In the short term, rising interest rates still seem to be forcing people who have been hesitating to make decisions, which has meant many fence-sitters have still been jumping in to buy. But in the longer run, that uses up future demand. Then, if rates continue to go up like this, we could begin to feel a real pinch," Mr. Moore said.

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