Rising mortgage interest rates are supposed to be an economic sedative, but the hyperactive real estate market has retained its vigor even as the prime lending rate has climbed to a nearly four-year high.
One of the biggest reasons for real estate’s unusual behavior is that home mortgages are less expensive than they were 14 years ago when the Federal Reserve Board began to push up the short-term cost to borrow money.
That inflation-fighting effort has raised the prime rate from 4 percent in June 2004 to 6.5 percent today, making it more costly to buy cars, appliances and almost anything else on credit.
Meanwhile, home mortgages have remained a relative bargain. The average national rate for a 30-year fixed-rate mortgage stood at 5.89 percent through Thursday (5.86 percent in Washington), down from 6.41 percent during the first week of June 2004, according to HSH Associates, an industry research firm.
Those low financing costs mean home buyers can qualify for larger loans. The trend troubles Federal Reserve Chairman Alan Greenspan and many other economists, who worry cheap mortgage money is contributing to a real estate pricing bubble that could trigger a traumatic recession.
“It’s very hard to understand the psychology of any market,” said UCLA economics professor Edward Leamer.
Homeowners who capitalized on the housing boom by borrowing against their properties are starting to get squeezed by the increase in short-term mortgage rates. Most home equity loans carry adjustable rates tied to the prime rate, which is widely expected to surpass 7 percent by year’s end as the Federal Reserve continues to clamp down on the economy. The average rate on a home equity loan is expected to reach 7.04 percent by the end of this month, up from 4.68 percent in June 2004, according to HSH Associates.
Through March, home equity borrowing totaled $911.4 billion, up 28 percent from $714.7 billion the previous year, according to Federal Reserve statistics. It’s difficult to predict how high mortgage rates will have to rise before home prices are hurt, but industry observers like Karevoll believe the tipping point is somewhere between 7 and 8 percent.
Meanwhile, current mortgage rates remain enticing, especially to buyers who remember when rates were still above 10 percent in the 1990s, said Denver-area real estate agent Bill Kosena. “Interest rates are extremely low,” he said. “I don’t know how it gets any better than it is.”
Refinance a Mortgage – Five Things You Need to Know