Higher rates, less house

Expected Fed decision would reduce buying power

John Rebchook, Rocky Mountain News

Published January 31, 2007 at midnight

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Mortgage rates could hit 6.5 percent by the end of the week, driven higher by what is likely to be today's decision by the Federal Reserve to leave short-term rates unchanged.

The higher mortgage rates - being fueled by a stronger than expected economy - will mean many buyers will be forced to buy less expensive homes.

At the beginning of December, people looking to buy or refinance a home could find a 30-year rate at slightly less than 6 percent.

Those days are gone.

"Mortgage rates are rising hard," said mortgage banker Lou Barnes, co-owner of Boulder West Financial Services.

He said rates are rising because of a "colossal forecast error. The bond markets assumed the housing decline would lead to a slower growth rate and the Fed would begin to ease its rates. But the economy is doing just fine. Rates could easily reach 6.5 percent by Friday."

And in the coming months, it is likely that rates will "equal the highs of last year, which was just under 7 percent," Barnes said.

The good news is that a stronger economy brings more home buyers into the market. The bad news: Higher rates either knock some people out of the market or force them to buy less expensive homes.

The rising rates also will increase the number of foreclosures, as many people with adjustable rate mortgages will see their rates rise to the 8 percent range, Barnes said.

Peter Lansing, president and CEO of Universal Lending, agreed, although he said there is enough pent-up demand that home sales won't be slowed.

"There is no question that the rising rates have a negative effect on those people who have adjustable mortgage loans," Lansing said.

Many of these loans have pre-payment penalties so the home-owners can't afford to refinance them even to 6.5 percent, he said.

"They can't sell their homes, they can't refinance their homes, and they can't afford their homes because of the adjustable rate mortgages," Lansing said. "This creates a perfect storm for foreclosures."

For prospective home buyers the biggest impact of rising rates will be that they could be forced to buy less expensive homes, Lansing said.

For example, at 6 percent a buyer would pay $1,798.65 in principal and interest each month for a $300,000 mortgage.

At 6.5 percent the same monthly payment would cover a $284,565 mortgage.

"This is a $15,434 reduction in buying power due to the half a percent increase that has occurred in a two-month period of time, December through January," Lansing said.

"Consumers should know that as interest rates go up, their buying power is reduced."

Some people aren't buying homes now because they think prices will fall. But even if they're correct, rising interest rates could offset the lower price, Lansing said.

Keith Gumbinger, vice president of New Jersey-based HSH Associates, which tracks mortgage rates nationwide, said mortgage rates are rising "because things are just too good" with the economy.

"But it's hard to get too upset with the current interest rates," Gumbinger said. "They are still really low by historical standards."

Vanessa Ingalls is glad she and her husband refinanced their home in West Highland in early December.

"We hit it at a good time," Ingalls said. "We got a 6.125 percent rate, which isn't bad."

Tuesday she checked Wells Fargo and the rate had risen to 6.375 percent.

Rates haven't risen enough to derail prospective home buyers, said Realtor Alison Eibner of Meridian Metro Brokers.

"They do not seem to be spooking anybody," Eibner said. "My sense is that most people were not stretching as they were in years past, anyway."

Outlook on mortgage rates

• MORTGAGE BROKER

"The Fed on pause at 5.25 percent must feel like the audience at a Keystone Cops flicker during one of the . . . chase scenes."

Lou Barnes, Boulder

• REALTOR

"Some people realize they need to lock in these rates while they are still attractive."

Mic Ortega, Keller Williams Realty

• HOME BUYER

"I guess (rising rates) would not prevent us from buying a new house. But we would not be happy about it."

Vanessa Ingalls

• SELLER

"Obviously, the quick answer is I hope that it doesn't dissuade anybody from buying. At first, rates were creeping up, and then they went down, and now they are going higher. I hope this persuades people that now is the time to get in a house before they go way up."

Jeff Rorabaugh, who is selling his home in Broomfield for $265,000

rebchookj@RockyMountainNews.com or 303-954-5207

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