Rob Braunstein said his search for a three-bedroom home on a quiet street in Needham, Massachusetts is taking on more urgency as he watches mortgage rates tick higher. Every increase, he worries, shrinks his budget by boosting monthly payments, he said.
The average rate for a 30-year fixed mortgage has risen for each of the past four weeks and is now at the highest level in a year, according to government mortgage-buyer Freddie Mac. While that's already put a dent in the refinancing boom that has powered bank earnings this year, for buyers like Braunstein, the message is clear: buy quickly.
"Refinancing depends only on mortgage rates and therefore is very sensitive to changes in rates," said Jed Kolko, chief economist at San Francisco-based Trulia Inc., an online property listing service. When it comes to buying, "some people might want to hurry up and make a purchase, but with inventory so tight they might not be able to move that fast."
Mortgage rates rose to 3.81% last week from 3.35% at the start of May as the Federal Reserve signaled to bond investors it may scale back the stimulus that had driven borrowing costs to record lows, amid signs of continuing improvement in housing and the U.S. economy. This week's average rate, released today at 10 a.m. New York time by Freddie Mac, may be the fifth consecutive increase, based on bond prices that guide mortgage rates.
"Have we seen the rock bottom for interest rates go past?" said Keith Gumbinger, vice president of HSH.com, a Riverdale, New Jersey-based mortgage information website. "That's a pretty reasonable certainty. We are off the record lows. To get back to those record lows, we'd need to see a considerable slowdown in the economy."
Mortgage applications to purchase homes fell 1.6% last week and are 6% below a three-year high at the beginning of last month. Applications to refinance loans dropped 15%, the fourth straight decline, to the lowest level in more than a year, according to the Mortgage Bankers Association.
The Fed said yesterday the economy expanded at a "modest to moderate" pace in 11 of 12 Fed districts, with broad-based gains ranging from business services to construction and manufacturing, based on a survey concluded May 24.
"Right now, the bad news for mortgage rates is all the good news we're seeing for the economy," said Mark Goldman, a mortgage broker at C2 Financial Corp. in San Diego. "When investors are afraid, they go to the bond market, and when they feel optimistic, they go to the stock market."
Fed officials will meet June 18 to consider whether they will curtail the pace of their mortgage-bond purchases. The Fed has been buying $45 billion of Treasuries and $40 billion of mortgage bonds a month to push down borrowing costs.
Their decision may hinge on employment, and the picture remains murky. Companies in the U.S. hired fewer workers than projected in May, the ADP Research Institute reported yesterday, suggesting the Fed may move cautiously to withdraw from the market. Ending the $85 billion monthly bond-buying effort too soon would do more harm than good, Fed Chairman Ben S. Bernanke said two weeks ago in testimony to Congress.
"A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery," Bernanke said.
A yearlong housing market rebound is helping to make Americans feel more optimistic about their futures. The Conference Board's consumer-confidence index climbed to the highest level in more than five years in May, the New York-based private research group said last week. The S&P/Case-Shiller index of property values in 20 cities rose 10.9% in the year through March, the biggest 12-month gain since April 2006.
"People think the 3.5% mortgage rate is going away, and 'I better hurry,'" Hui Shan, mortgage strategist for Goldman Sachs Group Inc. said in a telephone interview.
Braunstein, the Needham home shopper, said he's going to look at a house this weekend that on paper "looks perfect." The longer he waits to make a deal, the fewer options he has, he said.
"The rates have a dramatic effect on the way I look at the market," said Braunstein, 47, a manager for Credit Acceptance Corp., a car-loan financier.
While rising mortgage rates historically have lowered house prices because buyers can afford less, the decline may be less this time around because home prices remain below the 2006 peak of the real estate boom, said Goldman Sachs' Shan. Rates are also near historic lows and are down from 6.8% in 2006, more than 10% in 1990 and 18.63 in 1981.
The firm projects appreciation will moderate, with prices rising at an average annual pace of 4% to 5% over the next few years. In April, the median U.S. home price rose 11%, down from March's 12% that was the highest since 2005, according to the National Association of Realtors.
The average buyer, getting a 3.81% mortgage rate, can afford a $279,000 house, 45% higher than the U.S. median home price, according to a June 4 note to clients written by Shan and other Goldman Sachs analysts. A one percentage point increase in mortgage rates would only negatively impact U.S. house-price appreciation by one percentage point, it said.
Kolko estimates that even if rates went as high as 5.5%, two full percentage points from where they were in early May, buying would still be 33% cheaper than renting, nationally. With rates at 3.5%, buying is 44% cheaper than renting, he said.
"Affordability's fantastic, as long as you have a job" and can qualify for a mortgage, Bill Rayburn, chief executive officer of FNC Inc., a property information service based in Oxford, Mississippi, said yesterday at the National Association of Real Estate Editors conference in Atlanta.