The U.S. economy's surprising resilience since Hurricane Katrina is pushing long-term interest rates up sharply, raising prospects for 30-year fixed mortgages to cross the 6% threshold for the first time since spring.
The average rate on a conventional 30-year loan was 5.91% as of Friday -- up from 5.71% at the start of September and from 5.53% in early July, according to mortgage giant Freddie Mac.
Home loan rates are driven in part by rates on long-term U.S. Treasury bonds. The rates, or yields, on bonds are being pushed up by the Federal Reserve's credit-tightening campaign and by the threat of worsening inflation from continued high energy prices, analysts say.
Higher interest rates mean borrowers get less house for their money. As a result, fixed-rate loans above 6% could "slow the pace of sales activity and slow the pace of price appreciation" in the housing market, said Robert Kleinhenz, an economist at the California Assn. of Realtors.
In the short term, however, a rise in mortgage rates could boost home sales, Kleinhenz said. "If buyers anticipate that rates will be headed north in the foreseeable future, that will give them an incentive to shift their buying plans forward," he said.
Treasury bond yields surged again Monday after a report showed solid expansion in the U.S. manufacturing sector in September -- belying concerns that business activity might suffer in the aftermath of Katrina.
The manufacturing data show "the U.S. economy is in a substantial cruise-control phase," said Michael McGlone, a bond analyst at investment firm ABN Amro in New York.
The annualized yield on the 10-year Treasury note, a benchmark for mortgage rates, jumped to 4.39% on Monday, up from 4.33% on Friday and the highest since Aug. 10. Bond yields rise as the securities' prices fall.
A few more ticks higher and the 10-year T-note will be at its highest level since mid-April.
Some investors rushed to buy bonds, and lock in yields, immediately after Katrina hit the Gulf Coast at the end of August.
The bet was that the storm's effects -- particularly record energy prices -- would ripple across the economy, slowing consumer and business spending.
Many bond buyers also figured that the Federal Reserve would stop raising short-term interest rates, at least temporarily, to gauge the extent of the economic disruption.
Heavy buying of Treasury securities pushed the yield on the 10-year T-note down to 4.02% on Aug. 31. It had been at 4.21% less than two weeks earlier.
