Back to good ol' days -- 1978 -- when US home mortgages last saw single digits

Americans who bought houses before 1978 have enjoyed an advantage that their more recent neighbors could only wish for: single-digit, fixed-interest mortgage rates. For the past seven or eight years, these people have felt pretty smug about ``getting in'' early while other folks had to pay 13, 14, even 16 percent for home loans.

But the rates many thought would never return may be coming back.

Helped by a combination of slower home sales, an apparent easing of Federal Reserve monetary policy, and hoped-for effects of the new Gramm-Rudman deficit-cutting law, 30-year fixed mortgage rates are now in the 10.5 percent range in some locations in the United States.

This matches the rate on all Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages. In many places, the increasingly popular 15-year mortgage is already under 10 percent.

While lower rates have not set the housing market afire, they have prompted more people to refinance out of old, expensive mortgages. For these homeowners the question is: Can we wait a little longer?

``I would doubt that we'd get to single-digit rates, but I wouldn't rule it out,'' said Lyle E. Gramley, chief economist at the Mortgage Bankers Association and a former member of the Federal Reserve Board. ``Long-term rates could go down if the Gramm-Rudman-Hollings bill turns out to be a significant piece of legislation and really does bring about a balanced budget by 1991.''

``We can see rates going down another 50 to 75 basis points,'' predicted Karl Mendenhall, senior vice-president for marketing at Cameron-Brown Company, a mortgage banker in Charlotte, N.C.

The firm has lending operations in 23 states around the country. Each percentage point contains 100 basis points, so a decline of 75 basis points would bring the prevailing mortgage rate to 9.75 percent from the 10.5 percent level that Mr. Mendenhall says is ``pretty common'' around the country.

``We expect mortgage rates to keep keep drifting down a while,'' says Cynthia Latta, senior financial economist at Data Resources Inc., a Lexington, Mass., consulting firm. ``We haven't seen mortgage rates catch up with the decline in the bond market.''

The indicator to watch, Ms. Latta says, is the 10-year Treasury note. The latest yield on these comes out on Mondays and can be found in places like the Wall Street Journal on Tuesdays.

Whether the decline is over or nearly so, the fact is that rates are as low as they've been in six years, which should be releasing flocks of home buyers.

But things have been pretty quiet in the real estate market lately.

``These low rates have not resulted in a whole lot of activity,'' Mr. Mendenhall says. ``There doesn't seem to be a lot of pent-up demand out there. If there is any pent-up demand, one of the best tests of it is an increase in rates. If rates were to pick up a half point, that would scare people into moving now.''

On the other hand, there may just not be as many people out there who want to buy houses.

``The rate of household formation in the '80s has slowed compared to the '70s,'' Mr. Gramley points out. Also, he notes, the standards for getting loans approved have tightened somewhat, largely because of tougher lending guidelines issued last year by the Federal National Mortgage Association, or Fannie Mae.

While the Gramm-Rudman bill gets some credit for the recent decline in interest rates, other experts note that the drop actually began before it could have had an effect on financial markets, and these same experts don't put a lot of faith in the law's long-term effects.

``I don't think the markets have thought through all the implications of that bill,'' said James Christian, chief economist of the US League of Savings Institutions. ``And if things get tough, what Congress hath wrought it can unwrought.''

Mr. Christian is more heartened by things like OPEC's recent decision to fight for its share of the oil market by cutting prices. That, he says, will go a lot further to keeping inflation and interest rates down than a deficit-cutting bill.

Even with rates as low as they've been in more than half a decade, they still seem to have a way to go, then, so people who are able to wait to make a home purchase or refinance an older mortgage probably should do so.

For refinancing, the rule of thumb is that the new rate should be at least 2 percentage points lower than the old one. This gives you enough savings on your monthly payments to make up for all the costs of taking out a new mortgage: a new appraisal, application fees, and bank service charges or ``points.'' These days, most lenders are charging two points, or 2 percent of the loan balance.

``If I had a shot at a 101/2 percent mortgage, I'd sure take it,'' Mr. Christian said. ``I did refinance in October at 11 after waiting and waiting and I'm not sorry.''

However, if you're only planning to stay in the house a year or two after refinancing, a two-point differential between your old mortgage rate and the new one may not be enough. But if it's three points or more, you can break even in a much shorter time.

For rate-watchers, Ms. Latta at DRI recommends keeping an eye on those 10-year Treasury notes. Because mortgage rates tend to ``lag'' or move behind rates like these, you'll probably have at least a couple of weeks to make a decision after Treasury notes start up again.

But as long as those rates are heading south, the climate for mortgages should keep warm, as well.

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