Mortgage rates usually track rates on intermediate Treasury notes -- particularly, five- to seven-year Treasury issues. Mortgage rates will be a couple of percentage points higher, as a rule of thumb.

This summer, that relationship broke down as Treasury rates moved down, but mortgage rates only partially followed.

The Federal Reserve lowered interest rates three times. The stock market soared. But, according to reports, banks have tightened their lending policies, rather than loosening them.

Mortgage rates now hover around 6.7 percent, down slightly of late.

Some economists see the old relationship between mortgage and T rates coming back. But economist always have two hands -- as in, "On one hand yada yada yada, but on the other hand, blah blah blah.

Mortgage rates are sensitive to the volume of refinancing If there is a lot of re-fi activity, mortgage rates will stay higher than they ordinarily would because of prepayment risk: Buyers of mortgage-backed securities want protection against the new, lower rates they face because of the re-fi wave.

The latest report from the Mortgage Bankers Association of America says refi activity is down slightly.

The consensus of 46 economists polled by Blue Chip Financial Forecasts is for the five-year Treasury note to average 4.3 percent in the first half of next year, and 4.4 in the second half. Thirty year fixed rate mortgages would average 6.4 percent all year.

Ross Starr, economics professor at the University of California San Diego, can see the 30-year mortgage rate at 6.4 percent early next year.

"The mortgage market has been acting quite independently of the Treasury market because there was such a disruption in the relationship between corporate interest rates and Treasury rates the last few months," he said.

Mark Riedy, professor of real estate finance at the University of San Diego and head of the Real Estate Institute there, thinks the 30-year fixed rate may be 6.5 percent by the middle of next year -- "a low rate," he says.

Rates have been sluggish, he said, because of the refinance activity. Investors in mortgage-backed securities didn't want yields to fall very much."

One thing pushing the mortgage rate down next year will be a lower rate of home financing, caused by a weaker economy, as well as a flatness in mortgage re-finance activity.

Gary Schlossberg of San Francisco's Wells Fargo Bank says that by the end of 1999's first quarter, "the yield on the fixed-rate mortgage could be around 6.75 percent."

Maureen Allyn, chief economist of Scudder Kemper Investments in New York, said, "I am not looking for long rates to go down much. Maybe the 30-year Treasury long bond will go below 5 percent again, but you may not see the full benefit in the mortgage market."

Her advice to those deciding whether to snap up a rate now or wait: "I wouldn't wait."

Published: December 3, 1998

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