Economists forecast 'modest' cuts in mortgage interest rates

Falling mortgage interest rates are beginning to light a fire under home sales, and analysts say home buyers can anticipate further modest reductions in mortgage costs in coming months.

Sales of new homes soared 21.9 percent in September to a seasonally adjusted annual rate of 679,000, the Commerce Department reported Tuesday. It was the biggest monthly jump in more than four years. As sales rose, new-home prices climbed to an average $100,100, after dropping for three months.

Continued reductions in interest rates are expected to provide additional fuel for home sales in the next several months, according to private economists and Reagan administration officials.

President Reagan told the US League of Savings Institutions annual meeting here that ''interest rates should drop still further in the days ahead.'' Interest-sensitive industries like housing and automobiles ''will pick up and gather new strength'' as a result, added Mr. Reagan, who spoke to the group by telephone.

But analysts caution that September's increase overstates the real pickup in home sales.

''Most of the jump occurred in the South,'' notes David Berson, an economist at Wharton Econometric Forecasting Associates. In that region, sales soared 52 percent because of exceptionally good weather and declining mortgage costs. Sales in the Western portion of the nation rose only 3 percent, while sales fell 13.9 percent in the Midwest and dropped 5 percent in the Northeast.

Wharton does see sales nationwide ''coming up the next couple of quarters'' as mortgage rates ease, Mr. Berson says.

Interest rates will be ''coming down in 1985 through the first half,'' says Mark Riedy, executive vice-president of the Mortgage Bankers Association of America.

Then, near the end of 1985, rates will begin to climb and push sales back down, Berson continues, as demand for credit picks up and the Fed moves to nip inflationary pressures expected to develop later next year. As a result, housing starts in 1985 will total 1.69 million vs. 1.81 this year, Wharton estimates.

Any changes in mortgage rates tend to come slowly because home-loan rates tend to be less fluid than other interest rates. For example, the rate on 52 -week Treasury bills came down 1.19 percentage points from Aug. 29 to Oct. 24 to the 10.63 percent range. Meanwhile, the average rate on 30-year fixed-rate mortgages dropped only 0.33 of a percentage point in the same period, to 14.05 percent.

So even if other interest rates do not drop any more in the weeks ahead, mortgage rates should come down until they move into line with other long-term rates.

And a variety of economists see interest rates easing generally in the near term as the economy weakens, inflation is held at relatively low levels, and Federal Reserve Board policy eases.

Treasury Secretary Donald T. Regan said Monday that ''if the Fed does ease money over the next several months, as conditions seem to warrant and many are forecasting, then I believe interest rates will continue to decline.''

In his first public criticism of the Fed in several months, the secretary noted that the nation's money supply, as measured by M-1, has grown only 1.5 percent since last June.

''By anyone's yardstick that is not loose money. It leaves a lot of room for the Fed to ease,'' he told the US League of Savings Institutions meeting.

Mr. Regan's old policy nemesis, Martin Feldstein, former chairman of the President's Council of Economic Advisors, told the convention Tuesday that the Fed is pursuing a ''sound monetary policy,'' which reduces the risk of inflation.

Kent Colton, executive vice-president of the National Association of Home Builders, expects that Fed policy will lead to a ''modest'' decline in mortgage rates in coming months. He says fixed-rate loans could dip to the 13 percent region in 1985 and then begin ''bouncing in that range.''

James W. Christian, chief economist at the US League of Savings Institutions, says fixed-rate mortgages in 1985 will ''vary between 123/4 percent and 141/2 percent (and) average 131/2 percent.''

He says that interest-rate scenario would lead to housing starts of 1.5 million to 1.6 million in 1985, vs. the 1.7 million to 1.8 million most analysts expect for 1984.

In explaining the construction slowdown, Mr. Christian notes that pent-up housing demand from the 1981-82 recession largely will have been satisfied, apartments have been overbuilt in some areas, and high interest rates and home prices will keep a home out of reach for many people.

Housing would become even more affordable if major reductions were made in the size of the federal deficit, some experts say. The deficit adds 3-to-4 percentage points to interest rates, argues Jack Carlson, executive vice-president of the National Association of Realtors.

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