Despite the run-up in rates, homes remain affordable in most markets across… (David Paul Morris, Bloomberg )
Mortgage rates have zoomed a full percentage point above their recent record lows, raising costs for borrowers and questions about the housing recovery.
A standard 30-year fixed-rate home loan hit an average of 4.63% on Monday before backing off just slightly Tuesday, according to HSH Associates. That's up from 3.49% on May 3 and an all-time average low of 3.44% during a week in December.
Although still low by historic standards, the increased rates have put a damper on a home refinancing boom and will make buying a home noticeably more expensive for borrowers. What's more, some experts say, the rapid run-up could pose a threat to consumer confidence, delivering a blow to the recovering housing markets and even beyond.
"This stuff does feed back into the real economy," said Russ Koesterich, global chief investment strategist at money management giant BlackRock Inc.
Mortgage rates already had been rising gradually before last week, when Federal Reserve Chairman Ben S. Bernanke signaled the Fed could begin tapering its massive purchases of Treasury bonds and mortgage securities this year.
The bond purchases — which benefit businesses and borrowers by keeping interest rates low — could end by the middle of next year, Bernanke said, rattling markets that also are skittish about a credit crunch in China, the world's second-biggest economy. The reaction included a sell-off in stocks as well as a sharp jump in the interest rates demanded by bond investors.
The yield on the 10-year Treasury note, generally a benchmark for fixed mortgage rates, rose for the seventh straight trading session Tuesday to close at 2.59%. It was 1.66% on May 2.
Should the yield on the 10-year reach 3%, and mortgage rates rise to 5%, that could cool the housing market and maintain downward pressure on stocks, Koesterich said. The combination of lower stocks and slowing appreciation in home prices could stifle consumer spending.
"This is going to undermine that wealth effect that the Fed has been trying to create," Koesterich said.
The immediate effect of record low rates was to stimulate home refinancing, a trend that hit high gear in September 2011, when the 30-year fixed rate dropped below 4% for the first time on record.
The pace of refinancing had dropped 40% even in the month before the recent jump in rates, a Mortgage Bankers Assn. financial commentary noted Friday. Regardless of whether the jump in rates reflects a new reality or just volatility in a skittish market, refinance volume "is likely to fall further," the trade group said. Home purchases have been on the upswing, but not enough to make up for the decline in refinancing.
Higher rates have an instant effect on family budgets. At 3.5%, a borrower who bought a Southern California home for May's median price of $368,000 would have a principal-and-interest payment of $1,322, assuming a 20% down payment.
At 4.5%, that payment rises to $1,492.
At 6%, still a decent rate by historical standards, the payment goes up to $1,765.
Mortgage rates also have contributed to a recent sell-off in home builder stocks. Shares of Los Angeles' KB Home are down about 20% from recent highs in May, with Lennar Corp. and Toll Brothers Inc. off by nearly that much.
Despite the run-up in rates, homes remain affordable in most markets across the nation, said Rick Sharga, executive vice president of Carrington Mortgage Holdings. Prices remain about 25% off their peak during the housing bubble.
"And interest rates are lower than any time in history — other than the past 12 months," he said.
Homes in Southern California are less affordable, not surprisingly, but that has more to do with skyrocketing home prices than interest rates, Sharga said. Doug Duncan, Fannie Mae's chief economist, said rapid run-ups in mortgage rates in 1994, and again in late 1999 and early 2000, caused home sales to fall sharply — but didn't depress prices.
Those increases in mortgage costs were caused by the Fed's raising short-term interest rates dramatically, Duncan said. The central bank has shown no signs of taking similar action now, he said.
The Fed's current bond-buying program has no precedent, Duncan said, making it difficult to make comparisons with the current situation.
Duncan said the higher rates would have the immediate effect of pricing certain stretched borrowers out of the market. But he said he thought it would take rates rising to 6% over the next 12 months to depress home purchases and prices.
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