Attack Of Sticker Shock

Is the Great American Housing Party over? In 1981 U.S. mortgage rates began declining from a peak of 16% to less than 9% earlier this year. During that span the previously stagnant building industry boomed, and millions of U.S. consumers rushed to buy new homes or cash in their old mortgages for cheaper ones. Last week, though, lenders, home buyers and builders were shaken by the sharpest mortgage-rate run-up in years. The interest-rate hike may prove to be temporary, but it caused a minor panic. "The rise was so sudden that most consumers are still dazed," says Eric Fessler, vice president of Kadilac Funding, a Long Island, N.Y., mortgage company.

In just two weeks the national average interest rate on a 30-year fixed- rate mortgage jumped from 9.25% to 10.25%, and at some banks to about 11%. A 1 percentage point increase on a $100,000 mortgage at 9.25% would boost a homeowner's monthly payments by $73, to $896, or a total of $26,280 over the life of the loan. Homeowners with adjustable-rate mortgages, which now account for about 20% of outstanding home loans, may face automatic payment increases if the rate hike persists.

Lenders laid the blame for the increase on the bond market, where interest rates have risen sharply in recent weeks in reaction to the widening U.S. trade deficit and the falling value of the dollar. Home loans are now more sensitive to volatility in such markets because of a trend known as "securitization." That is a process in which lending institutions repackage their home loans as securities for resale to other investors rather than collect interest and principal themselves. The practice makes mortgage rates more sensitive to economic flare-ups. Even so, most financial experts contend, securitization keeps home loans more affordable. Reason: lenders can tap funds from a huge financial marketplace rather than just from local savings depositors.

Economists generally believe the mortgage shudders are unlikely to become a long-term trend. Contends Lyle Gramley, chief economist for the Mortgage Bankers Association of America: "There is no reason for interest rates to continue going up. That would slow the economy so much that the run-up wouldn't be sustained." But the abrupt halt to the flow of ever cheaper mortgage money might handicap an otherwise healthy homebuilding industry. Last week the Commerce Department reported that housing starts during March fell to an annual rate of 1.77 million, a 3.2% drop from the previous month.