Average rates on mortgages rose this week to their highest level in more than two years, but analysts remain optimistic about the implications for the housing market and the economy in general.
According to Freddie Mac's primary mortgage market survey, 30-year, fixed-rate mortgages rose 8 basis points to an average of 7.71%. This was the highest rate since 7.72% in the week that ended June 13, 1997.
Fifteen-year mortgages also rose to an average of 7.34%, from 7.28% last week. The rate has not been that high since the week that ended June 6, 1997, when it averaged 7.40%.
Rates jumped in anticipation of the hike by the Federal Reserve policymakers Wednesday, said Robert Van Order, Freddie Mac's chief economist. The Federal Open Market Committee raised the federal funds rate Wednesday to 5% from 4.75%.
The Mortgage Bankers Association said Wednesday that in the week that ended June 25 mortgage loan applications fell 0.7% from the week before, a trend attributable to rising rates. Similarly, applications were down 7.1% from the same week last year.
That raises some concern about the sustainability of the housing boom, which has been an engine for the economy's stellar performance. Bruce W. Harting, a Lehman Brothers managing director, said he does not expect purchase-loan volume to fall much further.
"The rise in long-term interest rates would have had more of an effect over the last four or five months," Mr. Harting said. "For lenders, this is a sweet spot-a great environment.
"Refinancings are O.K., but they would rather see home-purchase loans. That is where you grow your portfolio."
Mr. Harting added that the decrease in refinancing volume means adjustable-rate mortgages will gain popularity. He expects ARM activity to make up about 20% of the loan volume this year, up from last year's 13%.
Bear, Stearns & Co. analyst David Hochstim said the economy is strong enough to offset the negative effects of higher rates.
"As long as there is a link between the economy and rates, there is a balance, and higher rates coincide with a strong economy," Mr. Hochstim said. "People have jobs and incomes and can afford houses."
But he added, "you have to consider that home prices won't go up if rates continue to rise and lenders have more concern about credit in a softer economy."
Mr. Hochstim observed that though the refinance boom created fees for lenders in the past year, it did little for their growth. Less refinancing means more money in people's pockets, which strengthens the economy, he said.
Mr. Van Order said that when the Fed raised short-term rates, it quelled fears of inflation and interest rates began to ease. But when the National Association of Purchasing Management's factory index was released Thursday, showing areas of strength, rates began to climb again.
Mr. Van Order said that the employment figures released today will be crucial in determining which way the markets will go. He said a strong report will push interest rates still higher, while a weaker report would have the opposite effect.
