Mortgage Rates Increasing

Posted In: Housing, Interest Rates

More bad news for the housing sector. Mortgage rates rose for the sixth consecutive week. The 30-year, fixed-rate mortgage now stands at 6.53%, or a 10-month high. Rates continue to climb as strong economic data and Federal Reserve Chairman Ben Bernanke seem to suggest that the Fed will not be lowering interest rates anytime soon. A strong employment report along with positive data from both the manufacturing and service sectors dampened expectations for a rate cut. Also, Chairman Bernanke said on Tuesday that the U.S. economy should grow at a “moderate” pace in the next few quarters, casting further doubts on the Fed lowering rates in the near future. As a result, yields on 10-year Treasury notes have steadily approached the 5% mark, surpassing it earlier today for the first time since August 2006.

Rising U.S. government bond rates have a significant effect on prospective homebuyers, since mortgage rates are benchmarked to the yield on the 10-year Treasury note. The average rate on 30-year fixed-rate loans climbed to 6.53% for the week ending June 7. When home loan rates rise, the borrower’s monthly mortgage payment increases. Since buyers look carefully at monthly payments to gauge a home’s affordability, higher monthly costs can limit the amount they can offer for a home. And if rates march as high as 7%, as Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), expects, that could have a major impact on buying patterns, says Keith Gumbinger of financial publisher HSH Associates, which tracks the mortgage industry. “It would make it more likely that [buyers] would sit on the sidelines,” he said in CNNMoney.com earlier today. “That would put downward pressure on housing prices.”

As for future interest rate moves? Goldman Sachs does not expect the Federal Reserve to cut rates in 2007 or 2008 for that matter, according to statements issued Tuesday. Interest rate futures traded in Chicago show traders are betting on a nearly 40% chance the Fed will raise rates by the end of 2007.

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