Mortgage rates rise toward 5-year high

Surge adds to burden on already struggling real estate markets

Mortgage rates are nearing a five-year high, raising the cost of home ownership for buyers by hundreds or thousands of dollars a year at a time when real estate markets are struggling with tepid demand and a surplus of houses for sale.

The average rate for a traditional 30-year fixed mortgage jumped to 6.74 percent, from 6.53 percent a week ago, Freddie Mac, one of the nation's largest mortgage investors, said yesterday in its weekly market survey. That was the biggest one-week jump since 2004, and in just one month rates have come up by more than one-half a percentage point.

"This is the kind of thing that may prevent the housing market from recovering more quickly," said Larissa Duzhansky, regional economist for Global Insight, a Waltham consulting firm. "This is just another downward pressure," she said.

First-time home buyers are usually hardest hit by higher borrowing costs. This group typically is less financially prepared to absorb unexpected cost increases and may not have enough money to increase down payments as a way to lower their expenses. For example, the monthly payment on a $300,000 mortgage is $1,946, about $100 more than it was just three months ago, said Brian Koss, managing partner of lender Mortgage Network Inc. in Danvers.

Mortgage rates are going up due to rising yields on 10-year Treasury bonds, which mortgage rates are linked to. Treas ury rates are increasing because of growth in the US and global economies, which increased the demand for borrowing to finance business activities, boosting the price for credit, or interest rates.

But economists said they do not anticipate a wider impact on the economy overall because US growth is accelerating and is strong enough to offset the effects of a housing downturn. While, the US economy grew at an anemic 0.6 percent annual rate in the first quarter, it is expected to post stronger growth in the second and third quarters, possibly exceeding 2.5 percent. The housing industry accounts for about 10 percent of the economy and its recent troubles sheared about 1 percentage point off the growth rate.

The housing slowdown initially did hurt the economy when it began last year; that impact has diminished later in the downturn.

Rapid economic growth, particularly overseas, and higher mortgage rates are "not going to slow down the freight train" of corporate profits and buyouts, Brian Bethune, another Global Insight economist, said.

The sudden surge in mortgage rates is causing a burst of buying from home shoppers angling to take advantage of the price declines. These house-hunters want to buy quickly, before rates increase further.

The median price of a single-family house was $319,314 in April, down 4.7 percent over the past year.

"The rise in rates actually helps some people [move] off of the fence," Mortgage Network's Koss said. "It's a short-lived impact. There are a fixed number of people on the fence."

Gil Campos, an agent for Re/Max Real Estate Center in Foxborough, said this gives a little more momentum to sales in June, typically one of the best sales months.

"A couple first-time buyers I'm working with are anxious to find a house because they're afraid the rates are going to have to go up, and they'll have to pay more. They want to buy a house," he said.

Despite recent increases, mortgage rates remain historically low . Agents and lenders said the effect on housing would be much greater if rates go above 7 percent.

"We haven't had 7 percent in a long time," Campos said.

After bottoming out in June 2003 at 5.21 percent, weekly mortgage rates hit a peak in July 2006 at 6.80 percent, but then drifted down. They haven't been above 7 percent since 2002, nor sustained that level since 2001.

Kimberly Blanton can be reached at blanton@globe.com.