Low inflation, recovering economy could mean 'comfortable' mortgage rates

The line from "The Wizard of Oz" "... ding, dong, the witch is dead ..." could describe the Fed's fears of inflation based on comments from the last FOMC meeting March 19.

While they aren't cranking up short-term rates at the moment, they have adopted a "bias" toward raising rather than lowering them for the balance of 2002, now that a recovery clearly is un-der way.

The belief is that improved production output should offset any inflationary tendencies, with the possible exception of energy costs, which are likely to rise, particularly if arctic exploration legislation can't be passed by our politicians.

The cessation of rate reductions by the Fed can be traced back to around Hallo-ween the onset of signals that the recession had ended. Con-sumer confidence had declined to 84.9 on Nov. 1, but by Feb-ruary of this year, it was back to 110.2. The purchasing managers' report of Oct. 1, 2001, stood at 39.5, but Feb. 2, it was 54.7 eclipsing the 47.9 of Aug. 1, 2001, where it stood before Sept. 11.

The expected Fed funds rate (over-night money banks borrow) which was as low as 1.75 percent, is forecast to return to 3.25 percent by the end of 2002. For comparison, the one-year Treasury Index reached a low of 1.93 percent Nov. 7, 2001, and was up to 2.66 percent by March 21 of this year.

As to the outlook for mortgages, ac-cording to information from the Mort-gage Bankers Association, rates are expected to "trend" higher throughout the year.

This is a result of the Fed's bias to head off any potential inflation from the return to a stronger economy.

This rise already has been confirmed since the time frame referred to earlier around Oct. 31, 2001 when FHLMC 30-year mortgage rates were at 6.54 percent, compared to the 7.18 percent we've seen recently.

Typically during an economic recovery the short-term rates will rise faster than long-term rates, and the yield curve will "flatten."

This suggests that long-term rates, while higher over time, will not rise dramatically from their present levels that already reflect an increase of three-fourths of a percent since last fall.

To put this in perspective, the current 7.18 percent rate for 30-year, FHLMC fixed-rate conventional loans is still lower than the comparable rate during ALL of 2000 and the last eight months of 1999.

We're still in a historically "friendly" rate environment, even though the rates are a little higher than the unprecedented levels seen in 1998 and again briefly during the late summer and fall of 2001.

One must conclude that now is an excellent time to be a participant in the housing industry.

Builders have a large volume of units to choose from, Realtors are highly sophisticated in their ability to tell potential home buyers what is available, and mortgage lenders offer almost instantaneous approval in this age of computer technology.

Even slightly higher rates from here still will be low by historical standards, and they should not in any way be a roadblock to financing the purchase of a home. The remainder of 2002 should continue to be outstanding for housing. Whether you're building, brokering, buying, selling or financing, "... there's no place like home."

(Michael R. Rankin, a certified mortgage banker, is the branch manager of the Springfield office of Chase Manhattan Mortgage.)