Housing Boom Seen Shrugging Off Rate Hikes

Mortgage interest rates crept above the 8% mark for the first time in more than two years Tuesday, but most real estate experts in California said the increase is unlikely to slow the ongoing housing boom or rattle the state’s thriving economy.

Interest rates for 30-year fixed rate mortgages, positioned just below 8% at the end of last week, inched up to 8.08% Tuesday, according to HSH Associates, a New Jersey-based financial publisher.

Rates hovered around 7% for much of the last year and have not climbed past 8% since June 1997, the company’s data showed. But California real estate experts point out that while the rise in rates might prevent some people from buying homes, rates are still low compared with those of a decade ago.

The increase will certainly have an effect on home buyers, said Bob Bray of Meyers Group, which studies the new-home-building industry. But that effect might simply mean that a buyer who could afford a $300,000 home might have to settle for one costing $275,000.

“Rates are still so low compared to the double digits of the 1980s that a quarter- or half-point increase is not going to kill the current housing market,” Bray said.

Mortgage lenders said borrowers have been aware of rising interest rates--spurred by the bond market’s fear of inflation--for the last several months.

Home buyers have begun to swing away from 30-year fixed-rate mortgages, turning their attention instead to new hybrid products that offer lower rates during the first few years of repayment, followed by a switch to an adjustable rate.

“We’re definitely not seeing a slowdown in purchase activity,” said Stephen Brandt, senior vice president at Countrywide, one of the nation’s largest lenders. “Probably now more than ever, consumers are more educated as far as what programs are out there.”

The climb to 8% rates, he said, is more a psychological barrier than a financial one for most buyers. For example, the difference between the monthly payment on a $200,000 loan at 7.5% and the same loan at 8% is only $69, he said.

Nonetheless, buyers who are extremely interest rate sensitive could be immediately--and adversely--affected by the rate hike.

“It’s really a concern for the first-time buyer . . . someone who barely qualifies to buy their first home after living in an apartment,” said real estate broker Fred Sands. He added that rising prices are probably a bigger obstacle to buyers than rising interest rates.

Other groups that could suffer as a consequence of higher rates are those who hope to refinance and those who are buying newly constructed homes, said Dan Hanson, senior vice president for national mortgage giant Norwest Mortgage. Families buying new homes often have escrows of six or eight months, so steadily rising rates will hurt those who have not locked in a rate with their lender, he said. The drop-off in refinance mortgages has already occurred, Hanson said.

“We’re probably off 20% from last year’s refinancing market,” he said, adding that most homeowners holding high-interest loans already refinanced during the last two or three years, when rates dropped to levels not seen in 30 years.

Real estate experts agree that rising rates can deter some buyers. But for others, rate increases can provide motivation to purchase, said Leslie Appleton-Young, chief economist for the California Assn. of Realtors.

“It drives people to be more aggressive,” she said. “It injects an urgency factor in the market and gives people a reason to act before interest rates get potentially higher.”

Consumers’ confidence in their individual economic situations is at least as important to the housing market as interest rates, according to some experts.

“As long as people have jobs and are feeling secure, a minor tick in interest rates is not going to kill the housing market,” said Christine Diemer Iger, chief executive of the Building Industry Assn.’s Orange County chapter. “There’s a lot of pent-up demand out there, and the employment rate is just tremendous.”

And as long as the market is perceived as booming, economists and mortgage lenders said, there is nothing magical about the 8% threshold. In fact, some said, it’s only at 9% or 10% that consumers start to back away from the market or turn to adjustable-rate mortgages over the more traditional fixed rate.

“As long as people anticipate prices are going to increase . . . then I would not anticipate Southern California real estate [is going] to slow down,” said Stephen Cauley, associate director of the Real Estate Center at UCLA’s Anderson School. The rate increase “is not going to be like putting the brakes on the economy.”