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July 29, 1988
Rates rose a little last week, though not as much as as they could have given the economic data. The Second Quarter GNP rose a reported 3.1%, a little less than expected, but still strong. The scary number was a 4.1% rise in the GNP Deflator, one of the best measures of inflation, which had been up only 1.7% in the first quarter. That is the sharpest quartertoquarter rise in the deflator that I can remember.
Other data supported inflation fears: Existing Home Sales rose 5.5%, Machine Tool orders rose 17.8%, Durable Goods orders rose 8.8%, Personal Income rose .7%, Personal Consumption rose 1%, and a broad measure of wage increases showed the largest gain in years.
Chairman Greenspan told Congress yesterday that the Fed had not changed policy in recent weeks, "but expected to err on the side of credit restraint." That's a little like Mike Tyson saying he expected to err on the side of hitting too hard rather than not hard enough. Watch Fed Funds: when they go up to 8% for a couple of days, mortgage rates are headed towards 11%.
I'm afraid such a move is closer to "when" than "if." However, Wall Street is so bearish that in the next 10 days or so we are likely to get a brief, contrarianstyle improvement in rates. If an improvement appears, it seems to me a good idea to lock in anything you can find. You have solid grounds for "rates may go up" advice to clients it's not hype, now.
Even if rates do go up, I don't think it will hurt our local recovery much. For example: the California Association of Realtors reported that the median home price out there is now $160,000, and only 28% of California households could afford such a price. A price disparity of this magnitude is causing migration to a much less expensive Colorado. In another kind of market, but one important for our economic health, office leasing in the metro area is finally recovering. The vacancy rates haven't moved much, but absorption of space is running at double last year's pace.
A mortgage rate rise shouldn't get you down, as we have many other things in our favor. However, you can minimize the damage of a rise by managing your lockin timing.
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