Bumpy Day for Wall Street, Your Street : Mortgage Rate Jump Jolts Homeowners and Hopefuls Into Action
Jittery home buyers phoned their lenders to “lock in” low rates and real estate agents were preparing for fence sitters to finally purchase a home as mortgage rates jumped Thursday amid turbulence in the nation’s financial markets.
The rate surge, which had been preceded by a gradual increase in recent weeks, has bumped the typical long-term, fixed-rate mortgage to about 8% from about 7.5% a month ago. The increase will make it more difficult for home buyers to qualify for loans and, if sustained over the next several months, could hamper the recovery of Southern California’s long-suffering residential real estate market.
“People are very nervous right now,” said mortgage broker Steve Abo, who has been getting the lenders to confirm and freeze rates, often for a fee, for his clients for the last 1 1/2 weeks to protect them from further increases. “Many people are just calling in to see if their locks are still good.”
Rising rates translate into higher monthly mortgage bills for homeowners. The monthly payments on a $200,000 mortgage, for instance, rose $22 in the last week as rates climbed, according to Earl Pettie, editor of Mortgage Rate News. The monthly payment is nearly $75 higher than it was in mid-February, when rates began their current upswing.
Long-term, fixed-rate mortgages move in response to changes in the yields on long-term Treasury bonds, which have shot up since the Federal Reserve Board raised the federal funds rate--the rate banks charge each other for overnight loans--earlier this week as part of a strategy to reduce the threat of inflation. On Thursday, the 30-year Treasury bond hit 7.08%, up from Wednesday’s close of 6.98%.
The increase in rates comes as Southern California’s real estate industry prepares for the busy spring home-buying season and emerges from a deep recession. The conditions are similar in some respects to those in early 1994, when the region was enjoying a spurt of rising sales and prices that withered away under rising interest rates.
“It seems that whenever the Los Angeles real estate market heats up, wham! Rates go up,” said Abo, a mortgage broker at Credit America Financial Service in West Los Angeles.
However, in the short run at least, the boost in rates could help the market by sending many buyers scrambling to buy a home and avoid even higher rates, say real estate agents and housing industry observers.
After the Fed raised the federal funds rate a quarter of a percentage point earlier this week, real estate broker Nancy Amortegy, manager of the Ventura office of Prudential Jon Douglas, instructed her staff to tell buyers “to get off the mark. The result has been that people who have been waiting have decided it’s not worth waiting anymore.”
Esmail Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange County, said the strong demand for housing, high levels of home affordability and employment growth will more than offset the impact of higher home loan rates. Housing sales could start to suffer significantly if rates breach 9%, but that is not considered likely by many mortgage rate observers.
“Will this cause a big dent in affordability? We don’t think so,” said Adibi.
More daunting to some is how to satisfy the demand for homes as the supply of available properties remains tight.
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Escalating Rates
Thirty-year, fixed mortgage rates are on the rise. The average rate among Southern California lenders since January 1996:
Thursday: 7.945%
Note: Each rate is for a loan with two points, or a fee equal to 2% of the total amount borrowed.
Source: Mortgage News Co.
