Boom needn't sputter at 8%

Mortgage rates rising, but the pain isn't really felt until 9%

Some impact inevitable

August 08, 1999|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

Mortgage rates in the Baltimore metropolitan area are knocking on the door of 8 percent. But is that cause for concern? Will higher mortgage rates begin to choke the area's 2-year-long housing boom?

"I don't believe it for a second," said Marc Witman, president of the Greater Baltimore Board of Realtors.

"People make too much of these barriers," said Robert Van Order, chief economist of Freddie Mac, the government-chartered body that purchases mortgages from lenders and resupplies them with cash to issue new mortgages.

"I don't think the mortgage rate will move much higher than that," said Anirban Basu, director of applied economics for the Regional Economic Studies Institute at Towson University.

So at 8 percent, it seems that people who either observe or make their living in the real estate industry don't think that there will be a dramatic drop in sales.

But they are acknowledging that the market may be moving into a cooling-down period after months of increasing existing-home sales.

On Friday, the Freddie Mac national survey reported that the average 30-year, fixed-rate mortgage rose to 7.89 percent, the highest since May 1997.

Likewise, in the Baltimore area, the 30-year fixed rate rose to 7.89, according to HSH Associates, a New Jersey firm that tracks and analyzes mortgages and whose national average this week was at 8.06.

"Even at 8 percent, the interest rate is still better than most of the time during the 1990s," said HSH Vice President Keith Gumbinger.

The last time a 30-year fixed rate in Baltimore rose above 8 percent was May 2, 1997, when it averaged 8.09 percent.

"Will it take some people out of the market? Perhaps. Will it cause some people to buy less house than what they were thinking of? I think so," Witman said. "But I think, if you look at it historically, housing booms have never been driven by low interest rates.

"We have had some low interest rates during some of the worst sales periods in our history. In the mid-1990s, rates were great, and you couldn't give houses away."

But as rates climb into the 8 percent range, they do affect the home buyer's wallet.

The principal and interest on a $150,000 loan at 7 percent -- where the Baltimore market was last winter -- is $998. At 8 percent, it rises to $1,100 -- a $102 monthly difference. Over the life of the loan, it means an extra $36,700 in payments.

"This will have an effect on the market," said Van Order. "There will be an effect for some types of trade-up buyers because a lot of people really did refinance into 6.5 to 7 percent mortgages. For them, as rates get up to 8 [percent], the extra cost of trading up [to a new home] is giving up the low-rate mortgage for the high-rate mortgage."

The most recent rise in rates is being attributed to talk of another interest-rate increase by the Federal Reserve at its meeting this month as well as to the improving economies of the Pacific Rim.

"I believe what we are seeing is the unworking of the Asian crisis," Basu said. "That was not a normal period. Rates are now rising to more normal levels, levels that are not associated with international economic crisis, but improving growth throughout the world and steady growth in the U.S."

The rise, however, has brought new life into adjustable-rate mortgages that were all but dead when fixed-rates dropped below 7 percent last fall. According to Gumbinger, ARMs made up 11 percent of all mortgage originations in March. By June, their share had risen to 22 percent.

Industry observers say that as long as other economic factors remain solid, demand may dwindle, but overall, the market will not suffer.

"For there to be a housing boom, two elements need to be in place," said Towson's Basu.

"One is an underlying strong economy that continues to produce job growth and generate low unemployment rates. That piece of the puzzle remains in place, and there is no reason to believe that the U.S. economy and regional local economy will not remain robust through the first half of 2000.

"The other factor is housing affordability, and clearly housing affordability has been compromised by the recent uptick in interest rates, which has now turned into a pretty large increase in interest rates.

"One piece of the puzzle remains, but one would expect that home sales will begin to soften in the months ahead, and we await the July and August reports with great anticipation."

And there is anticipation of whether 8 percent becomes an intermediate resting place toward a drive to 9 percent -- a rate that hasn't been seen since early 1995.

"I think it's not probable that rates will drift that much higher," Van Order said. "If mortgage rates went up to 9 percent, I think that would be a problem, but I don't think that is probable."

At 9 percent, Witman said, "I think that is where it starts to get painful. Interest rates in the 8's are still a bargain."

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