Lured by the sharpest mortgage-rate drop in years, Georgette and Ray Ezell began scouring towns along the Connecticut shore for a house late last fall. By Christmas, rates for a 30-year conventional loan had plunged to 7.75%. But an unexpected uptick in recent weeks (chart) put their search in high gear. On Mar. 17, they grabbed an 8.8% mortgage for a three-bedroom Cape Cod in Clinton, Conn. "We should have locked in when the rates were a lot lower," laments Georgette. The Ezells will pay an extra $1,395 a year.
The jump in rates--now 9.1% nationally--has sent buyers like the Ezells scurrying for loan applications and sales contracts. Their purchases have fostered what appears to be a boomlet in residential housing sales. In San Francisco, sales of single-family houses were 24% higher in February, 1992, than in February, 1991. Granted, sales had stalled early last year because of the Persian Gulf war, but the increase is still impressive. "When interest rates moved up, people really got off their duffs," says Marie Dierks, a Coldwell Banker Inc. agent in the Houston suburbs. Pittsburgh's Janet and Glenn McGuire decided in mid-February to mull over a lender's quoted rate--and woke up the next day to find it had climbed one-quarter of a point. They settled for the new rate in a hurry. Good thing, too: "Rates have gone up since," says Janet McGuire.
SHORT SPIKE. The increase, however, has not been so severe as to threaten turning the boomlet into a downdraft and squelching the market's slow recovery. Several factors augur well for the future: First, rates are nowhere near 1990's prohibitive double-digit levels. Second, consumer confidence is creeping back, especially outside the stricken Northeast. "It's not ebullient, though it's better than three months ago," says Leonard Miller, chairman of Lennar Corp., Florida's largest homebuilder, which boosted earnings 55% in 1991. And fal-ling prices have made houses more affordable, especially for first-time buyers. In San Francisco, the median price tumbled from $300,000 in February, 1990, to $264,000 two years later. Industry officials are now believers: According to the Commerce Dept., February housing starts were 9.6% higher than in January.
Perhaps most encouraging for housing fans, the rate spike may be just a temporary phenomenon. Many predict that rates may retreat to about 8.5% by midyear. The Federal Reserve, which since mid-1991 has helped engineer the decline, is committed to keeping rates low, particularly in an election year.
SECOND CHANCE. The rate increase, beginning in early January, was spurred by signs of recovery and the resulting inflation willies. But the market has overreacted. Because of productivity gains during recessions, inflation is seldom bad in the first year of a rebound. Once the markets digest this, analysts predict, 30-year Treasury-bond rates, now at about 8%, will ease. So should conventional mortgages, whose spread over the long bond is around one percentage point.
All of which means that buyers should have a second chance this summer to get a low rate. Just how low, however, will vary by region. Demand is most robust in the Midwest, which wasn't hit so hard by the recession. Result: Lenders in that region will be under the least pressure to drop their rates.
Refinancings of existing mortgages--exchanging more expensive old debt for cheaper new loans--will also have to await better days. "They've basically come to a crawl," says John J. Sousa Jr., president of Commonwealth Mortgage Co. in Burlington, Mass., where refinancing had quadrupled in December and January.
Meanwhile, lenders expect those who can't wait for rates to ease--such as people who have to move for a new job--will turn to adjustable-rate mortgages. ARM rates, now running about 6.2%, haven't jumped as much, because they are tied to shorter-term Treasuries, whose rates have stayed relatively low. ARM rates are usually reset yearly. Hence, they are less popular than conventional mortgages, which offer the certainty of fixed payments.
Wherever the loans come from, the real estate industry is grateful for some good news. "Housing has led us out of every recession since World War II," says Lennar's Miller. Mortgage-rate fluctuations notwithstanding, that should be the same this time around.