- The Washington Times - Friday, May 4, 2001

Treasury bond rates are down again, inflation is in check, and the economy is still questionable. These are the variables that might keep mortgage interest rates at current levels, say several economists from the real estate and banking industries.

Still, consumers are always in search of the ever-elusive lower rate, hoping to figure out what economic indicator to watch as a sign that rates will drop even more.

"What you don't want to do is be an interest-rate speculator," says Doug Duncan, chief economist for the Mortgage Bankers Association of America, "because you can see what the results are for a pro is that sometimes they make money and lose money."

Despite this advice, many home buyers spend their time checking Web sites and thumbing through newspaper real estate sections searching for the lowest rate and lowest number of points. They also wonder why mortgage interest rates don't drop when the Federal Reserve eases its short-term interest rates.

"The Fed is trying to understand what is an appropriate level of liquidity in the economy that will allow a sustainable, noninflationary level of growth," Mr. Duncan says. "Its No. 1 priority is the prevention of inflation, not necessarily to make mortgage interest rates cheaper."

To monitor mortgage interest rates, pass on the Fed and look at the 10-year Treasury bond, economic observers suggest.

"The Treasury bonds are viewed as a base to price everything else," says Fannie Mae chief economist David Berson. "If the market anticipates [that] the economy is going to move up, we could see bonds go up. We've seen them edge up some lately. A lot of people looking ahead are anticipating [that] the market is going to pick up and the Fed may have to tighten money supply next year, possibly, depending on how strongly and quickly the economy recovers."

Mr. Berson adds that he anticipates some tightening by the Fed in 2002.

Nevertheless, the Fed's moving up or down does not necessarily affect mortgage interest rates, says Lawrence Yun, chief economic forecaster for the National Association of Realtors. For instance, in the latest unexpected move, short-term adjustable rates fell, but the 30-year rates did not move.

Mr. Duncan of MBAA says, "Trying to time a bottom is like trying to time a top in the stock market. It can't be done with certainty. If the Fed makes another cut in the May meeting which may or may not happen, as the probability has gone down if they make a cut, the mortgage rates could go up. Any additional cuts at this point, if the participants in bond markets feel that inflation will go up, then the rates for mortgages could go up."

He says, "Mortgage rates are generally based on the 10-year Treasury bond. Sometimes [mortgage interest rates] are a little more over the Treasury. A typical 30-year loan doesn't last 30 years, which gives the consumer who is speculating on where interest rates are going a problem. It's possible the Fed cuts its rate and the market says, 'We're not expecting that cut' and therefore doesn't respond by dropping bond rates, thus keeping mortgage rates unmoved."

Mr. Duncan says another cut could, if anything, cause some excess demand for loans in the future, and the bond rates could edge up to compensate.

So who is "the market?" Be-cause the market holds so much control on mortgage interest rates, it is nice to know it is not one person or group of people.

Mr. Berson says, "The market is made up of thousands and thousands of individual bond traders and institutions who are buying and selling bonds every day, mostly the U.S. Treasury market, the biggest one, which affects all other interest rates."

He says, "It's the key market, where there are 'riskless bonds'; since we know the federal government is not going to default, there's no credit risk."

The Federal Reserve controls short-term rates. Mortgage in-vestors watch the Fed to see how long it takes rates to respond to Fed action to determine whether the moves forecast any inflation, Mr. Yun says.

Obviously, pumping money into the economy would spur inflation. "When the Fed is cutting rates, if people perceive that the economy is continuing to weaken, then the inflation-rate problem is not a concern going forward. Therefore, the 30-year mortgage rate would correspond to that decline," Mr. Yun says.

However, if the bond market perceives that with a cut, the economy is turning the corner and going back on track, say a few quarters down the line as the economy picks up, inflation would pick up with it, he says. "Then they may feel the economy is back on track, and if they perceive too much is being pumped into the market and could cause inflation, the 30-year rate would go the opposite way. Short-term rates would definitely go down, but it's not certain long-term rates would go down."

In reality, the low rates we have seen on the market today for mortgage loans actually were in the making last fall.

"Thirty-year rates fell back in November even before the Fed began cutting; because of the view that the economy was slowing down, mortgage rates were dropping beforehand," Mr. Yun says.

Mr. Berson agrees, pointing out that a lot of what happened before the Fed began to ease in January was that people in financial markets anticipated the economic slowdown, that inflation would be restrained and that the Fed would ease rates significantly.

"All the easing was already anticipated and incorporated in the rates and mortgage rates," he says. "And that's why we didn't see an additional drop [in mortgage interest rates] when the Fed eased last week."

NAR's Mr. Yun pointed out that the Fed so far has cut 200 basis points (2 full percentage points) since the beginning of the year. With those moves downward anticipated by bond traders last fall, mortgage rates headed down as well.

"Last summer, the average for mortgage rates was 8.5 percent; now they are at 7 percent," Mr. Yun says.

Getting into the borrowing game when interest rates do hit lows, as in this current market, can save home buyers more money than mere prospecting, he says.

Mr. Duncan agrees, saying "astute consumers will be well-informed on their housing needs and what their financial characteristics are. Are they a good risk? Have they saved money, paid bills on time?" These issues have a larger effect on the consumer's personal interest rate than the Fed's dropping rates, he says.

"Consider, instead, what kind of credit quality do you represent to a lender. Once you know what kind of risk you present, then you can go about assessing interest rates," he says.

"From an educational perspective, rates are lower than they have been for some time, and it is wise for people who can to take advantage of this opportunity," says Rosie Allen-Herring, Fannie Mae's senior deputy director for business development in the District Partnership Office.

"There are a myriad of resources from city programs to nonprofits, some down-payment and closing-cost assistance programs, to help consumers get into houses with the low interest rates today."

Mrs. Allen-Herring's department creates partnerships with the community, from government agencies to nonprofits, to craft initiatives that are specific to the Washington area. The District office is one of 49 offices across the country that work with more than 3,000 lenders.


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