August 13, 1999

Mortgage rates up, but why?

By TOM KELLY
The Real Estate Advisor

I returned from vacation to another example of how the market for home loans responds to the perception - not the actual state - of the economy.

The 30-year, fixed-rate national average for "jumbo loans" had broken the 8 percent plateau for the first time in more than a year, hitting 8.14 percent earlier in the week after spending most of the previous business week at 7.99. Jumbo loans, which are becoming more common in the Puget Sound area because of rising home prices in many areas, are for amounts greater than $240,000.

The 30-year, conventional market is not far behind, checking in at 7.92 percent at press time. On February 21, that rate was 6.73 percent. If we round off the figures and make them 6.75 vs. an even 8.00 percent, the cash difference on a $100,000 loan would be $85 a month - $649 for the 6.75 rate and $734 for the 8.00 rate.

The main reasons for the jump were reflected on Wall Street. Economic analysts said that the Dow Jones Industrial average lost 80 points in last week's final trading session on worries that the Federal Reserve would soon increase interest rates again. In addition, the United States Labor Department reported stronger than expected job growth, which re-ignited concerns over inflation.

Worries and concerns - but little actual reality to help explain matters to a first-time homebuyer.

When the economy is perceived to be too hot, interest rates go up. Trying to explain that perception to consumers can be very challenging - just ask any mortgage lender.

In a nutshell, interest rates rose because of the perception that greater job growth would have an impact on the future value of money. In a capsule, investors felt that other securities were more attractive than long-term loans, therefore money was less available for long-term loans, so the money charged to get a long-term loan went up.

While mortgage volumes are slowing, the home-sale business is down, too. The Northwest Multiple Listing Service just reported there were 5,669 accepted offers in July, a decline of 6.6 percent from the 6,069 sales in June. Last month's figures were still 5 percent better than a year ago, but surprising given the usually strong summer home-buying season. Sales inventory of single-family homes rose to 21,063 last month, up from 20,542 in June. The average asking price for active listings was $255,982, about 3 percent greater than the average price of $248,422 a year ago.

A few decades ago, loans were easier to call because they were a localized, often people-made situation. The corner banker sold an asset, or had several customers deposit money at the same time, and thus had more money to lend customers in the neighborhood. When he had this extra cash, the interest he charged his customers was a tad lower than usual.

However, the corner bank is now typically owned by a huge corporation, with money invested in a variety of instruments and places. The employees people who work in the bank make an educated guess, like you and I, where home-loan rates are headed.

They can tell you "rates are coming down" because they already came down. They say "rates are headed back up" because they went up yesterday or early this morning. But, unless they still operate like a corner bank, asking a lender to predict where rates will be later in the week will result in their best "guesstimate."

That's because loan representatives and bank branch managers simply have no control over uprisings in Japan, Central America and Russia and U.S. employment - the reasons behind the two major upward blips in the past year.

If reports like Treasury bill sales and stock and bond markets remain on an even keel, the rate you get on your home loan just might be what your loan rep thought it would be. To lessen the guessing - and the borrower's anxiety - lenders offer a lock-in option for a fee.

Bankers originate mortgage loans and then typically sell them in large blocks to huge mortgage clearing houses, which then sell the loans to investors on Wall Street. The banker usually services the monthly payments, keeps records and acts as an agent who disperses money for taxes and insurance. Some banks also sell the right to service the loans and derive income for the sale. If you are sending your monthly payments to a new place, then your original bank probably has sold your "servicing rights."

A mortgage banker's income comes from origination and servicing fees, and profits on the resale of loans. Because the loans now are sold as long-term securities on the international market, local bankers no longer control long-term interest rates.

Last December, I attended a conference were several mortgage experts were asked to offer their best take on what would happen to interest rates in 1999. The general consensus seemed to be "little movement" with most expecting 30-year fixed mortgage rates to fluctuate but not venture much above or below 7 percent. After touching a low of 6.46 percent last October, national averages for 30-year rate loans clearly have gone up more than down.

Predicting home-loan rates is not unlike predicting the weather. Really, if Harry Wappler and Alan Greenspan actually knew what was beyond five-day forecasts, think of the anxiety they could curtail. (Some folks believe Mr. Greenspan actually sets the forecast)

Why did rates go up half a percentage point recently? Didn't the experts predict little, if any, movement? Don't look for answers at your local bank.

Previous columns:

• Insurance changes apply to new loans, 07-30-1999
• Realtors debate Net's role, 07-23-1999
• Are too many millionaires ruining the area housing, 07-16-1999
• New tool in online property marketing, 07-02-1999
• Fixing up the home, 06-25-1999
• A father's gifts to his son, 06-18-1999
• Supply, not higher rates, restricting home sales, 06-11-1999
• Make sure mortgage is a safe assumption, 06-04-1999