U.S. rate for 30-year mortgage tops 6%

Slow rise may cool demand for homes, growth in prices


Mortgage rates rose this week above 6 percent for the first time in six months and will probably climb higher, likely cooling demand that has driven home sales and prices to record levels.

The nationwide average for a 30-year, fixed-rate loan was 6.03 percent, mortgage giant Freddie Mac reported yesterday. The last time it breached the psychologically significant 6 percent mark was the last week in March, when it hit 6.04 percent.

"The most likely pattern is for mortgage rates to gradually rise over time," said Frank Nothaft, chief economist at Freddie Mac. He added that the increase "will translate into somewhat weaker demand for housing, lower home sales volume and lower house price growth."

Higher borrowing costs mean that consumers won't be able to pay as much for houses. Rising rates also will likely dampen home equity loans, reducing the gush of cash that has stimulated consumer spending, the main driver of the nation's economy.

"You should expect to see more impact on the refinance market than homebuyers," said Doug Duncan, chief economist with the Mortgage Bankers Association, an industry trade group. "If people want to buy a house, they'll buy a house."

Interest rates near historic lows have led to four straight years of record home sales, and the nation remains on track for a fifth, with a forecast of 8.3 million new and existing houses changing hands.

"A record year is pretty much in the bag for home sales for 2005," Duncan said. "It will drop off 3.5 percent next year."

Even with record sales, the rising rates will be felt throughout the economy, said Scott J. Brown, chief economist for equity research at financial services firm Raymond James & Associates.

"I think they would dampen things," he said. "The extraction of home equity has been such a powerful force in supporting consumer spending."

Americans had about $600 billion extra to spend last year - the equivalent of 7 percent of disposable income - thanks to gains from selling, refinancing or taking out loans on their homes. Some used the money for home improvements and debt repayment, but it also enabled people to keep buying goods as usual in the face of rising gas prices. Now, energy costs are much higher - and borrowed money isn't as cheap.

Gina Martin, an economist with the financial services company Wachovia Corp., said homeowners with adjustable-rate and interest-only mortgages - which start off low and then balloon upward - will increasingly be stuck without the option of refinancing when their rates jump higher.

"They're simply going to have to make the payments they've committed to," Martin said.

Those consumers will have less money to spend elsewhere, though Martin doesn't believe their pinched wallets will translate into a major hit for the economy.

"A majority of the outstanding mortgage debt is still secure debt - fixed rates, and very, very low fixed rates," she said.

Rising interest rates will push some would-be homebuyers out of the market and make others think twice, Martin said. That slowing in demand could slow price growth, she said.

But some in the industry say many homebuyers realize that rates, while rising, remain relatively low. The monthly principal and interest on a 30-year, $100,000 loan at 6.03 percent would be $601.48, about $50 more than when the fixed rate bottomed at 5.21 percent in 2003.

"I think, two months ago, 6 percent was a psychological barrier, but now that we're in it, people are adjusting," said Dee Ziccardi, a mortgage banker with Countrywide Home Loan in Cockeysville.

Those most put off by the higher rates? Younger buyers, she said.

"We're dealing with a lot of first-time homebuyers," Ziccardi said. "They've only seen interest rates in the 5s. They're freaking out."

Most experts seem to agree that the impact from a small rise in interest rates ought to be kept in perspective.

"Our opinion is that rates are still at traditional lows, and this shouldn't affect home-buying or refinancing activity in a major capacity," said Charles J. DiPino Jr., a mortgage broker at Universal Trust Mortgage Corp. in Columbia and vice president of the Maryland Association of Mortgage Brokers. "Yes, there will be a little bit of a slowdown. But it's not a bursting bubble. It just may take three months to sell a house instead of three days. Six percent money is still great."

In Maryland, rates for loans that conform to Freddie Mac and Fannie Mae limits - a maximum of about $360,000 for a single-family home - topped 6 percent three times in March and April, then fell below 6 percent until last week, said Keith T. Gumbinger, vice president of HSH Associates, in Pompton Plains, N.J.

"We are expecting interest rates to be slightly higher," he said yesterday. "Inflation seems to be getting much more of a toehold than before."

He predicts that rates in Maryland and nationally will be 6.375 percent to 6.5 percent by year's end.

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