Mortgage rates take welcome dip

June 09, 1994|By John E. Woodruff | John E. Woodruff,Sun Staff Writer

Maryland mortgage interest rates have fallen by a half-percentage point in three weeks, a welcome boost for the state's recovery and the first relief from soaring home-financing costs this year.

For Maryland's economy, which has been lagging behind the national recovery for nearly three years as its traditional mainstays such as defense, financial institutions and health care have been hard hit, mortgage rates are even more critical than in other states.

"The fundamentals suggest lower long-term interest rates ahead, and that is very good news for Maryland, which has come to depend so heavily on housing construction to beef up its precarious recovery," said Charles McMillion, president of MBG Information Services, a Washington consulting firm that tracks the state economy.

The reversal signals that mortgage interest rates probably will remain at least stable for much of the rest of 1994, and rates may fall even further by the end of the year, economists say.

The swift drop in mortgage rates dates from May 17, when the Federal Reserve Board announced its fourth and toughest anti-inflation step of this year, a half-point bump up in short-term interest rates.

"The Fed finally convinced long-term bond investors that it was serious about wrestling with inflation, and since then the news, including the Fed chairman's own remarks, has been that the economy is growing safely with prices visibly under control," said Paul Havemann, of HSH Associates, a Washington firm that tracks mortgage interest rates.

"That's the kind of talk long-term bond investors love to hear, and when long-term bond rates come down, mortgage rates soon follow," he said.

The average Maryland rate for a conventional 30-year mortgage, with a 20 percent down payment, was 8.28 percent yesterday, according to HSH. That's down from 8.86 percent on May 13, the Friday before the Fed's latest action, a drop of 0.58 of a percentage point.

Each percentage point added to or cut from mortgage interest rates plays out to about 1,100 housing starts lost or gained in Maryland in a year, state Comptroller Louis L. Goldstein said in a recent letter to Alan Greenspan, chairman of the Federal Reserve Board, urging interest-rate stability.

Each housing start, in turn, adds to the state's job rolls and sales tax revenues, Mr. Goldstein said yesterday.

"You have between 400 and 700 people who benefit in some way, from preparing the site through the carpenters and laying sewer and water lines to the decorating and outfitting every time a house is built," Mr. Goldstein said.

For its part, the state takes in anywhere from about $2,500 to about $8,000 in sales tax revenues from a newly built home, counting the materials that go into construction and the big-ticket items such as rugs and drapes and appliances that the owner puts into it, he said.

The state has been expecting a decline in interest rates ever since the Fed's May 17 action, Marvin Bond, Mr. Goldstein's spokesman, said yesterday.

"Long-term rates had been inflated some, because the market was telling the Fed its first three quarter-point moves on short-term rates were not convincing," Mr. Bond said. "We happened to be selling bonds the next day after the decision, and we could see that we got a significantly better rate even that soon than we would have on the Monday or Friday before."

Mortgage rates, which had been creeping up in Maryland and elsewhere since bottoming out under 7 percent late last summer, rose sharply after the Fed's first short-term rate increases, on Feb. 4. Now, with long-term rates settling down and signs of slowing in the economy, the central bank's policy-makers are expected to hold interest rates steady for a while.

"You always have to allow for jokers in the deck like a crisis in Korea, but the Fed has basically taken itself out of the long-term interest picture for the time being," HSH's Mr. Havemann said. "I think long-term rates, including mortgage rates, are going to stay under control."

Maryland mortgage rates have moved down through the last three weeks slightly faster than national rates, which they usually track within a fraction of a percentage point.

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