NEW YORK - The 30-year mortgage rate, which hit 8% just four months ago, may soon creep above 9% for the first time in five years.
For prospective homebuyers and sellers rising mortgage rates are an unfortunate side effect of the 10-year economic expansion. The Federal Reserve has raised its target overnight lending rate for banks five times since June, to 6%, in an effort to keep economic growth from igniting inflation.
April's 3.9% unemployment rate, the lowest in three decades, suggests the Fed's actions have not yet dampened growth, and this fuels expectations that the central bank will have to become more aggressive.
That has sent mortgage rates up more than half a percentage point in the last three weeks, to about 8.7%, making homebuyers and those refinancing loans eager to borrow before the cost gets too high.
A rise above 9%, some analysts say, may put a crimp in the housing market, which is growing at a near-record pace despite mortgage rates two percentage points higher than in 1998. People are still upbeat about the economy and their personal finances, in particular since home prices are rising at a 7% annual pace, according to Freddie Mac, the nation's No. 2 mortgage financier.
"Customers are very much in a hurry to get things going" on their applications for mortgage loans, before financing costs go even higher, said Robert Withers, chief executive and president of First Alternative Mortgage Corp. in New Rochelle, N.Y.
The monthly payment on a 9% $200,000 mortgage would be $1,609. This is $131 more than a similar loan would have cost at the start of the year when rates were a little above 8%, and $345 more than in 1998 when rates hit a 30-year low of 6.5%. Higher monthly mortgage payments leave less for consumers to spend on other things, an important factor in the economy's growth.
Consumer spending accounts for about two-thirds of the gross domestic product.