Freddie Mac's latest survey of lenders, released Thursday, showed… (Patrick T. Fallon, Bloomberg )
With mortgage rates rising — and unnerving investors — Federal Reserve officials have swung into damage-control mode, trying to reassure Wall Street that they won't abruptly withdraw the stimulus that has kept long-term borrowing costs at record lows.
Freddie Mac's latest survey of lenders, released Thursday, showed the average rate for a 30-year fixed home loan had leaped to 4.46% from 3.93% last week — the biggest one-week jump recorded by the survey since 1987.
The benchmark 30-year rate is up more than 1 percentage point from the record lows that began last fall, including one reading of 3.35% just last month. Analysts said the increase would smother a long boom in mortgage refinancing and probably would slow down fast-rising home prices.
The markets seemed to be listening. The yield on the 10-year Treasury note — a proxy for fixed mortgage rates — fell to 2.47% on Thursday, down for a second day from a close of 2.61% on Tuesday. Stocks moved higher for the third day in a row.
Fears of an end to Federal Reserve support had prompted a recent sell-off in stocks as well as the surge in long-term bond and mortgage rates. That combination clearly concerned top officials at the Fed, which has been buying $85 billion a month in Treasury and mortgage-backed securities to keep rates low — a major stimulus for the key automotive and housing markets.
William Dudley, the influential head of the New York Fed, said Thursday that expectations for an early end to the bond-buying spree are "out of sync" with the intent of policymakers at the central bank.
The remarks were echoed by Fed Gov. Jerome Powell and a third policymaker, Dennis Lockhart of the Atlanta Fed, who said in prepared remarks: "There is no 'predetermined' pace of reductions in the asset purchases, nor is the stopping point fixed."
The issue facing the central bank is when to taper off on the extraordinary support and when to pull the plug altogether — a matter for speculation all year as the economy slowly improves.
San Francisco Fed President John C. Williams told The Times in early April that he could envision reduced bond purchases this summer and a halt by the end of the year — a more aggressive timetable than anyone is now discussing publicly.
The reaction in the stock and bond markets was touched off last week by much milder remarks from Fed Chairman Ben S. Bernanke. He said bond purchases might be reduced later this year if the economy continues to improve and could end next year — but only if unemployment drops below 7% from its current 7.6%.
Higher rates could restrain the heavy demand for housing that, according to the Standard & Poor's/Case-Shiller survey, drove home prices in 20 U.S. cities up an average of 12% in April, the biggest year-over-year gain in more than seven years.
That might not be such a bad thing, according to observers such as real estate consultant John Burns of Irvine. Housing markets, particularly in California, have begun to look overheated, he said, raising the prospect that another boom-and-bust cycle might be in the making.
"When home prices start rising 2% per month, which they have been in L.A., it becomes like a runaway train that you cannot stop," Burns said. "Rising rates should cool the rate of price appreciation."
An analysis by Freddie Mac's chief economist, Frank Nothaft, concluded that the nation's housing market already has split in two.
In the populous coastal corridors from Washington to Boston and from San Francisco to San Diego, it's already difficult for a family living on a median income to afford an average-priced home, Nothaft concluded. Seattle and Miami also appear unaffordable by this measure.
But in most of the rest of the country, rates and home prices are still low enough that housing is quite affordable for the average family, Nothaft said — and he added that it would take an increase of mortgage rates to the 7% range to choke off the positive trends.
"Higher rates will have some dampening effect at the margin, with the improvement in sales and prices not as high as it would have been" with lower rates, Nothaft said in an interview. "But it's not going to stop the housing recovery dead in its tracks."