Rising Home Loan Rates Hurt Sales

The price of money has gone up.

Or more technically, long-term mortgage interest rates have jumped in recent months, raising borrowing costs and rattling an already slumping market.

When potential home buyers call for mortgage rate quotes these days, they don’t like what they hear on the other end of the line.

“They’re shocked; they almost don’t believe you,” Jim Foley, senior V.P. of George Mason Mortgage, told the Washington Post. “They’re quick to get off the phone to make more calls.”

The average rate on a 30-year, fixed-rate mortgage rose to 6.74 percent in mid-June, up more than half a percentage point in four weeks, from 6.21 percent.

That boosts the monthly payment on a $400,000 mortgage by $139. Underlying the jump in rates was a shift in sentiment in the financial markets.

Early this year, many investors worried about a possible recession, amid myriad housing and bad credit mortgage problems, causing rates to fall.

More recently, they have concluded that strong U.S. and global economic growth will sustain inflation pressures in the months ahead, pushing mortgage rates higher.

Consumers are also paying higher rates on new home equity loans and auto loans. Many companies are facing higher borrowing costs.

Investors holding bonds purchased a few months ago have seen their prices drop, but they can now buy new bonds paying higher yields.

And rising interest rates tend to hurt the stock market.

Investors worry that higher borrowing costs will squeeze company profits and that bonds will become a more attractive alternative.

Money is still relatively cheap by historical standards. But the recent increases have stunned borrowers accustomed to easy money of late.

The big question for many consumers and investors is where interest rates are headed. If they keep rising, that would likely prolong and deepen the housing market slump, cool the stock market and slow the economy.

Already, some home buyers have rushed to lock in mortgage costs before they move higher, real estate professionals say. Others are holding off in hope that rates will come back down.

Economists aren’t much help because they are divided between those who think long-term mortgage rates will climb higher and those who think they’re more likely to settle around their current levels.

Longer-term rates are influenced by the Federal Reserve but ultimately are determined by global capital markets, which are influenced by the changes in the supply of and demand for money and by investors’ expectations for growth and inflation.

For example, one benchmark, the yield on the 10-year Treasury note, reached 5.32 percent at one point in mid-June, the highest since April 2002.

Long-term rates hit their lows in early March on fears of a recession. Pessimism peaked after the Dow Jones industrial average plunged more than 400 points in late February.

Bankers also reported rising home loan rates of home mortgage foreclosure and late mortgage payments, and many signs indicated economic growth had slowed to a crawl in the first quarter of the year.

The economy has rebounded, with retail sales, factory production and job growth all picking up in recent months.

The recent pop in rates shows “the bond market is finally realizing the Fed isn’t going to cut rates this year,” said Dean Junkans, chief investment officer of Wells Fargo Private Client Services.

Meanwhile, strong economic growth has fueled inflation pressures worldwide, prompting central banks in Europe and New Zealand to raise interest rates.

SOURCE: Chicago Tribune