Here is one more Mike. May be AG lost his power and the mortgage rates will do the job for him.<lg>
Mortgage Costs Could Ambush the
U.S. Economy
By ROBERT D. HERSHEY Jr.
harles Gradante and his wife, Lee, were on the verge of
refinancing their co-op on Sutton Place in Manhattan
late last year, but a big remodeling project so consumed
them that they failed to get around to it.
"I just let the thing slide, and before I knew it, interest rates
started to run up," said Gradante, a 52-year-old consultant to
hedge funds. "I didn't pull the trigger."
So the Gradantes have shelved their refinancing, one of
many early casualties of a bounce in interest rates this year.
Late last year, the couple could lock in a 7 percent rate for
30 years on their superjumbo $700,000 mortgage. Today,
they would have to pay 7.25 percent to 7.5 percent.
Instead, they are sticking with their current loan, which
carries a fixed 7 percent rate for seven years but can then
adjust annually for 23 years. If they refinanced at 7.25
percent now, they would have to pay an extra $146 a month.
Since October 1998, mortgage rates have been crawling
upward -- now an average of about half a percentage point
higher nationally. The first effect has been a decline in home
refinancings, which has put extra dollars in the pockets of
consumers and helped fuel a torrid consumer spending spree.
But if mortgage rates continue to rise from their current
levels -- still quite low in historical terms -- sales of homes
will drop off as well, as fewer people can make the monthly
payments. Furthermore, a significant increase in interest
rates would weigh on stocks and could provide some drag on
the overall economy.
By the second week of March, the average commitment rate
on 30-year mortgages had climbed to its highest point in nine
months -- 7.11 percent plus 1 percent of the sales price for
loans up to $227,150 -- according to Freddie Mac, the
government-chartered company that buys loans from lenders
and packages them as securities for investors. Bigger loans,
like the Gradantes' mortgage, tend to run about a quarter
point higher.
Rates have since receded a bit, to 6.98 percent this week,
but the possibility of a resurgence hangs over not just the
real estate market but the stock market and the booming
American economy. Friday's report on job creation in March
could prove crucial because each sign of robust economic
growth revives fears of inflation and the possibility of higher
interest rates in the financial markets.
If interest rates were to jump significantly, by perhaps a
percentage point, "it would be a disaster, the worst thing that
could happen," said Robert J. Froehlich, vice chairman and
stock strategist at Kemper Funds in Chicago. "You could see
the stock market easily give back 15 to 20 percent of its
value." He remains optimistic, however, that rates will
remain largely in check.
Rising interest rates make the bond market a relatively more
appealing place for investors to put their money than does
the stock market. Higher rates also raise companies' costs
both in conducting everyday business and in investing in
operations, putting pressure on corporate profits.
Tumbling stock prices could in turn chill consumers who
have been driving an economy that grew at a blistering 6
percent pace in the final three months of 1998 and shows
only modest signs of a long-anticipated slowing.
"To a significant extent, the highflying stock market is
responsible for the consumer spending spree and the lowest
savings rate since 1933," said Sung Won Sohn, an economist
at Wells Fargo & Co. in Minneapolis.
Sung noted that 48 percent of families now have some kind
of stake in the stock market, compared with 32 percent a
decade ago -- a fact "amplifying the impact of the sizzling
stock market" on household spending.
While higher rates would certainly take some of the steam
out of the housing market and, therefore, the economy, said
William C. Dudley, chief U.S. economist at Goldman,
Sachs, much would depend on what caused the rise.
It they rose because of a global economic recovery,
corporate profits would also benefit, and the net effect might
be a wash, he said. On the other hand, if rates rose because
of intensified upward pressure on American wages, that
would imply a return to inflation and would be more
problematic, he said.
Although rates on long-term Treasury bonds plunged as low
as 4.7 percent last October as foreign turmoil prompted
many investors to scurry for safety, average mortgage rates
did not fall as sharply, bottoming at about 6.5 percent.
Similarly, this year's upturn in Treasury rates has had a more
modest impact on mortgage rates.
Rates on many other forms of consumer borrowing,
including automobile and education loans, have been
virtually unaffected so far but would be swept upward by a
sharp rise in interest rates. Credit card rates tend to be less
sensitive to rate fluctuations because administrative costs
account for the bulk of their relatively high rates.
The mortgage rate increase of late, though, is starting to bite.
Applications to refinance home loans fell 11.7 percent the
week ended March 26, the Mortgage Bankers Association of
America reported on Wednesday, and stood 22.2 percent
below the level four weeks earlier.
"The refi business has definitely slowed up," said Melissa
Cohn, president of the Manhattan Mortgage Co., a leading
broker in the New York City area, even as the rise pushes
fence-sitters into action for fear rates could move out of
reach.
Refinancings accounted for just more than half all new
mortgages in 1998 and are projected to slip to 40 percent of
the total this year, according to Paul S. Reid, executive vice
president of the Mortgage Bankers Association. Total lending
is expected to decline 18 percent to a still-robust $1.2 trillion.
Borrowers are also shifting to adjustable-rate mortgages,
which means lower payments for now. The rates on
one-year adjustable mortgages are running about 1.2
percentage points lower than the rates on a fixed 30-year
loan, according to The Bank Rate Monitor. At the latest
tabulation, the number of applications for adjustable
mortgages was 54.5 percent more than it was a year earlier.
Still, many financial analysts are far from convinced that
rates are headed much higher.
James W. Paulsen, chief investment officer at Wells Capital
Management, sees no reason to believe that current
economic growth must lead to inflation. Actually, low
inflation is fueling economic growth, he said. "And what
inflation indicator has moved up to make you think that we
should have a 6 percent interest rate?" he asked. The
30-year bond now yields about 5.7 percent; the Treasury's
10-year note that is the main benchmark for pricing
mortgages, yields 5.3 percent.
Despite the tightest labor market since the 1970s, inflation
has remained tame. Consumer prices have risen just 1.6
percent the last 12 months.
And most people think it would take some pickup in inflation
to spur the Federal Reserve Board to push rates higher. The
Fed took no action at its meeting on Tuesday, not even
announcing a tilt toward higher rates in the future.
"We still expect the 30-year Treasury bond yield to retreat to
around 5 percent in coming months," said Maury N. Harris,
chief economist at Paine Webber.
David F. Seiders, chief economist for the National
Association of Home Builders, said that even if rates rose
further, his industry and its suppliers were likely to be spared
a direct hit.
"If people decide they don't want to lock into the higher
yield, they'll go for adjustable-rate mortgages," he said. "It
would soften the blow."
nytimes.com |
