30-year mortgage rates rise above 6%
Upswing threatens to put drag on prices
Interest rates on 30-year, fixed-rate home mortgages yesterday rose above 6 percent for the first time since late March, increasing the chances that housing prices could flatten or decline and signaling that the era of low mortgage rates may be coming to an end.
While rates remain low by historical standards, higher rates add to consumers' borrowing costs and make it harder for some buyers to afford homes at today's high prices.
In Massachusetts, where the number of homes offered for sale is up sharply, the combination of higher rates and a larger supply of homes for sales will probably put downward pressure on pricing, real estate specialists said.
The median 2004 selling price in the state for a single-family home was $340,000.
According to mortgage giant Freddie Mac, the average rate nationwide for a 30-year fixed-rate mortgage is 6.03 percent, the highest level since the March 31 weekly average of 6.04 percent and up from 5.98 percent the previous week.
Accelerating economic growth, ''coupled with the specter of rising energy costs, will translate into higher long-term mortgage rates in the coming months," Freddie Mac chief economist Frank Nothaft said in a statement.
He predicted rates could ''reach 6.4 percent by 2006."
Fueled by historically low mortgage rates, the housing market has been red hot in recent years. Low rates also spurred refinancing, which enabled consumers to pull cash out of rapidly appreciating homes. Flush with this money, consumers went on a spending spree. And consumer spending, which accounts for about two-thirds of the nation's gross domestic product, helped propel the economy. Now the housing market seems to be shifting gears.
With the Federal Reserve steadily raising short-term interest rates in a bid to contain inflation, Douglas Duncan, chief economist at the Mortgage Bankers Association, said consumers have mostly seen the last of fixed-rate mortgages below 6 percent. Except for brief and modest fluctuations, ''it's unlikely rates will come back down," he said.
Rising rates can push some first-time buyers out of the housing market and reduce the volume of mortgage refinancings, said John Bitner, chief economist at Eastern Investment Advisors, a division of Eastern Bank in Boston.
Historically, ''We begin to get resistance at 7 percent," he said. ''That's a real psychological barrier. But 6 percent? If someone wants to buy a house, a 6 percent rate won't discourage them."
Over the next year, a gradual rise in rates could translate into a ''correction" in home prices, meaning possible declines in the range of 5 to 10 percent, Bitner said. That's because many consumers can't afford high borrowing costs and high housing prices simultaneously; sellers might have to lower prices to make a deal.
Real estate specialists are split on whether housing prices are in a ''bubble" that is vulnerable to bursting because prices are outstripping fundamental values; others say the market will slow gradually and remain on solid footing.
At the Massachusetts Association of Realtors, communications director John Dulczewski noted that statewide year-to-date home sales were 4 percent ahead of 2004 through August. Prices will rise more slowly, but not flatten or fall, he said.
''Unless the economy starts shedding jobs," he said, ''we don't see any scenarios in which prices would decline."
When home prices skyrocketed in recent years, many buyers turned to adjustable-rate mortgages as a way to keep initial monthly payments low. But because of quirks in the bond markets that dictate mortgage rates, adjustable-rate mortgages may have temporarily lost some appeal.
''We're seeing a shift back to fixed-rate mortgages," said John Brodrick, president of First Service Home Mortgage in Westwood.
In the past, the initial rate for an adjustable-rate mortgage could be 0.75 percent lower than that of a fixed-rate mortgage. But the spread between the two has tightened recently.
This week, president and chief executive Rick Fedele of Summit Mortgage said his Boston firm was offering a 30-year fixed-rate mortgage at a 5.875 percent rate and a five-year-adjustable mortgage with an initial rate of 5.75 percent. On a $300,000 loan, the monthly payment on the fixed-rate mortgage would be $1,775, versus $1,751 on the adjustable-rate.
Such a tight spread is ''very unusual," Fedele said.
A study issued yesterday by National City Corp. and Global Insight removed Boston from the list of ''extremely overvalued" housing markets. The study examined single-family housing markets nationwide during the second quarter and concluded that 56 of 299 markets were ''at risk of future price declines." Boston, which had been on the groups' previous list, was taken off the current list because of ''improving fundamentals, such as income and population gains," the study said.
Chris Reidy can be reached at reidy@globe.com. 