Money & Finance: Interest Rates Steady As She Goes

January 1, 1996

The great news about mortgage interest rates in 1996 is that there's no news.

With a slow-growth economy, low employment gains, and no inflation, interest rates are expected to remain steady, at least through the first half of the year, says John A. Tuccillo, chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

"I see rates staying about where they've been," says Tuccillo. "And I see nothing to push them in either direction. 1996 and 1995 will be a lot alike."

Inflation has been all but vanquished. "There's no inflation in this economy," says Tuccillo.

But how will the Federal Reserve treat interest rates in this year's slow economy?

"So long as economic growth stays where we expect it--at roughly 2 percent annually--a low level of inflation means that the Fed won't see a need to reduce interest rates further."

Rates in a Nutshell

  • The national average commitment rate on the 30-year, fixed-rate mortgage "will hover in the bottom sevens," Tuccillo predicts--between 7 percent and 7.5 percent in the first six months.
  • The spread between the 30-year fixed and the adjustable rates will stay about the same, says Tuccillo. The average initial rate on the one-year ARM will hold at about 6.1 percent or 6.2 percent in the first half of the year.

Of the three major forces operating on mortgage interest rates during the year, "slow economic growth is probably the main force," he says. The gross domestic product will grow at about 1.9 percent to 2.0 percent in the first two quarters of 1996.

"There'll be a balancing out between low mortgage interest rates and slow economic growth," Tuccillo says. "This will make a housing market that remains pretty stable in 1996."

What will be the impact of low mortgage interest rates on home sales? Low rates will continue to be attractive to buyers, but the slow economy will cause others to hold back.

"You can expect existing-home sales for the year to be 3.65 million to 3.7 million just about like 1995," Tuccillo predicts.

Looking for a sign of healthy home sales? "Watch your local markets for employment gains. The amount of gain will determine whether you'll have a good or indifferent year," he says.

Across the country, employment will be weaker than in 1995, and that means many potential homebuyers will be reluctant to take financial risks, regardless of low rates, Tuccillo notes. Unemployment will stabilize while economic growth will be slow--just enough to maintain the unemployment rate at 5.8 percent for the year. The good news: Some local markets--such as Denver, Phoenix, Salt Lake City, and Portland, Ore., all of which have a low cost of living and are experiencing immigration from California--will see higher employment gains than the less than 1 percent gain predicted for the country.

Lucien Salvant is a former managing editor for REALTOR ® Magazine.

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