Don't wait for a better rate

May 10, 2001: 7:48 a.m. ET

Regardless of the Fed, mortgage rates are expected to hold steady
By Hope Hamashige

NEW YORK (CNNfn) - If you are trying to decide whether now is the right time to buy a home or refinance the mortgage on your existing property, you are certainly not alone.

Low mortgage rates are at least in part responsible for the current boom in refinancing activity and for the unusually strong home sales report last month.

But experts say if you hope to take advantage of low interest rates on long-term mortgage loans you'd better act now.

According to Freddie Mac, 30-year fixed rate mortgages averaged 7.14 percent last week but appear to be heading north. Mortgage loans hit their most recent peak of 8.64 percent in May 2000 and had been dropping steadily until mid-March, when the U.S. economy began showing signs of weakening.

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"The deals aren't going to get a whole lot better than they are now," said Robert Van Order, Freddie Mac's chief economist. "My advice to anyone considering this is to start looking around for the best deal they can get."

Don't wait for the Fed
Some, of course, are holding out for the next Federal Reserve meeting. The Fed is widely expected to cut short-term interest rates again by as much as a half point when it meets May 15. If that happens, it will be the fifth rate cut since Jan. 3, including the surprise, unscheduled half percentage point cut it made last month.

But economists note that whatever action the Fed takes next Tuesday will have little to no effect on long-term mortgage rates because the two do not necessarily move in lock step. In fact, at times, the two run in opposite directions.

The federal funds rate is for very short-term loans, such as those made overnight between banks. Long-term mortgages are more closely tied to 10-year U.S. Treasury notes because that is the closest measure of how long people keep mortgage loans these days.

In spite of the recent round of rate cuts, mortgage rates have made little downward movement: The Fed has cut short-term interest rates by two full percentage points since the beginning of the year, but long-term mortgages have hovered between 7.34 percent and 7.07 percent.

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Freddie Mac's economists expect interest rates on 30-year mortgages to remain in the 7 percent range for the remainder of the year.

Though a Fed rate cut would have little immediate impact on long-term mortgage loans, however, economists say it would help homeowners with one-year adjustable rate mortgages for the first year they own their home. Those rates, which averaged 6 percent last week, are directly affected by cuts in the federal fund rates.

Opposites attract
Mortgage rates began to fall last May and descended sharply through January. The steady downward march was, in fact, set off by a half-point Fed rate hike that was made as a hedge against inflation. An overall slowdown in the economy, combined with the high cost of short-term borrowing, caused lenders to lower rates to attract more borrowers.

Shoppers have already been taking advantage of the lower interest rates on long-term mortgages. Sales of new and existing homes in the United States jumped in March by 4.2 percent to a record rate of 1.02 million, up from 911,000 in February.

Refinancing activity also has been strong this year. According to the Mortgage Bankers Association of America, activity has reached a level not seen since October 1998, which was a record year for lenders.

Roughly 50 percent of the more than $351 billion in mortgage originations so far this year were refinanced loans, an indication that homeowners are looking to lock in lower rates.

Lawrence Yun, an economist with the National Association of Realtors (NAR), also credits lower rates for strong housing sales.

Despite some still-gloomy reports about the U.S. economy, Yun said NAR expects 2001 to be a good year overall. Lower mortgage rates, he said, have offset concerns about the softening economy.

Furthermore, NAR predicts the economy will pick up in the second half of the year and that mortgage rates will remain low. Yun said NAR expects rates to creep up slightly, to about 7.2 percent, by year's end.

Real clues in concern over economy
Some believe that the reason mortgage rates have been unphased by the Fed recently is that rate cuts were already priced into the equation. Banks anticipated the Fed eventually would lower rates in the fact of a slowing economy and jumped ahead to cut their own rates in advance.

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The real clue as to where mortgage rates will go, said David Littman, chief economist for Comerica Bank, lies in the economy itself.

"[Mortgages] tend to reflect inflation and the overall strength of the economy," Littman said, adding that any new dips in long-term rates will likely be a result of new economic concerns, not because the Fed makes additional cuts.

"It may not be the absolute bottom," he said, "but it's low."

Van Order added that anyone who has been waiting for rates to go even lower probably should just jump in to refinance or buy now. Historically speaking, lLong-term mortgages rates have rarely fallen far below the 7 percent mark, he said.

"We hit 6.5 percent in our survey some time in 1998," he said. "Getting below 7 percent is not all that easy. You have to go back to some time around the Tet Offensive to find rates much lower than that."