signpost up ahead "twilight-zone" Home-Mortgage Rates Jump
On Inflation and Rate Fears
By PATRICK BARTA
Staff Reporter of THE WALL STREET JOURNAL
Home buyers, get ready for some bad news:
Mortgage rates just jumped to their highest
level in five years, and they could be headed
even higher.
The average rate on a 30-year fixed-rate
mortgage climbed to 8.52% this week, up
from 8.28% last week, according to a weekly
survey released Thursday by Freddie Mac, the
mortgage servicer. That is the highest
mortgage rates have been since the week
ending March 10, 1995, when the average
rate on a 30-year mortgage hit 8.62%. A year
ago, the average rate on a 30-year mortgage
was 7.10%.
Chalk the runup to growing fears in the bond
market about inflation. Typically, mortgage
rates are priced according to rates for 10-year
Treasury notes, because the typical 30-year
mortgage lasts an average of only five to 10
years. (Most homeowners move or refinance
long before 30 years.) And recently, rates for
10-year Treasurys have surged, as investors
have grown increasingly wary that the Federal
Reserve will have to raise interest rates more
than expected to combat inflation.
For example, consumer prices, excluding
food and energy, jumped 0.4% in March, the
biggest gain in more than five years. That and
other recent figures have convinced investors
the Fed will raise the federal-funds rate, or
the rate at which banks lend to each other
overnight, to 6.5% from the current 6.0%,
rather than 6.25% as previously expected.
The result is higher costs for home buyers.
A home buyer who took out a $200,000
mortgage a year ago, when rates on 30-year
fixed mortgages averaged 7.10%, had a
monthly mortgage payment of $1,344. This
week, a homeowner who takes out a
$200,000 mortgage at the current 8.52%
average would have a monthly payment of
about $1,541.
In an ordinary year, that kind of rise would
surely slow home sales, but despite a modest
dropoff in some areas, the housing market
remains red-hot. The economy is still
booming, and, thanks to rising incomes and
continued gains from the stock market,
people so far have felt wealthy enough to pay
higher mortgage costs.
"In hot markets like Washington, D.C.,
people are bidding up prices of homes, and if
you're going to bid a price of a house up
$10,000, you're not thinking about how big
your mortgage is," says Guy Cecala,
publisher of Inside Mortgage Finance, an
industry newsletter. So far, he says, "every
indication is that [the rise in mortgage rates]
is having no effect whatsoever."
Moreover, rates still aren't that high,
historically speaking. The average for all of
the 1990s was 8.25% -- not far below current
levels, according to HSH Associates, a
Butler, N.J., financial publisher. And many
people are turning to adjustable-rate
mortgages, which have lower interest rates
for the first several years, before adjusting to
match current rates.
Even so, mortgage rates haven't been this
high in a long time; in February, they surged
to 8.38%, but then cooled off quickly,
dropping back to 8.12% last month. And their
current upward trend is likely to begin scaring
off some buyers.
"Mortgage rates are finally getting to the
point where people are at least paying
attention," says Ethan Harris, a senior
economist at Lehman Brothers in New York.
"We've probably got another [half a
percentage point] to go this summer" before
mortgage rates settle down, says Mr. Harris.
Home buyers, he says, would be smart to
"lock in now."
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