Mortgage Rate Hikes Spur Some to Lock In

Home mortgage rates are up slightly and probably will rise by at least half a percentage point as the economy improves, market observers say, but most analysts don’t expect higher rates to brake the momentum of Southern California’s hot housing market.

Another modest rise in rates may even drive some buyers into the market, they say.

Mortgage applications to either purchase or refinance homes jumped 14% last week compared with the previous week, the Mortgage Bankers Assn. said, fueled in large part by perceptions that interest rates will rise. Analysts estimate that average interest rates on homes, which have been hovering in the 7% range since last fall, could reach 7.5% late this year--still far below averages of the last three decades.

“Our experience shows as long as rates are below 8%, people are not really fazed by rates going up,” said Sung Won Sohn, chief economist at Wells Fargo & Co.

If rates top 8%, there will be a slowdown, agreed Dan Gilbert, chief executive of Quicken Loans, an online provider of mortgages. If rates stay in the 7% range, he said, “the market will remain strong.”

Nationally, the housing market has shown some vulnerability. New-home sales in January dropped 15% from the previous month, according to federal statistics. At the end of 2001, average U.S. home prices were rising at a significantly slower pace compared with earlier in the year.

With recent economic reports pointing strongly to recovery, long-term bond yields have been rising, pulling mortgage rates up as well. Many economists expect the Federal Reserve to raise short-term interest rates by June to prevent the economy from overheating and to keep inflation in check.

The average rate on 30-year fixed mortgages rose to 6.87% last week from 6.80% a week earlier, still below its level of 6.97% a year ago, according to secondary mortgage lender Freddie Mac. Rates sank to 6.45% in November 2001, the lowest level in at least three decades.

Even modest increases in rates mean fewer buyers will qualify for home purchases. In Southern California and in much of the state, challenges to buyers have been compounded by double-digit home price increases each year for the last few years.

Yet analysts said the loss of buyers because of higher interest rates could be offset if the economy rebounds.

Despite rising interest rates, John Johnston, chief executive at Marina Mortgage in Irvine, said he has not seen any drop in home lending, which at his company averages $65 million a month.

Leslie Appleton-Young, chief economist for the California Assn. of Realtors, said a small bump in rates could create an incentive for home buyers to sign deals before possibly being priced out of the market by higher rates.

Among those who believed he should buy before rates moved higher was Santa Monica College professor Howard Stahl.

“I didn’t hit the bottom [for rates], but I thought I had done pretty well,” said Stahl, who recently closed on a home in Brentwood with a 7% mortgage.

In Orange County, Alfred Somekh kept waiting for a housing market slowdown that never materialized.

Figuring rates would not head lower, Somekh, a renter for the last five years, decided to buy a home.

“The way rates could change and the way the market is improving, I figured now was the time to jump in,” said Somekh, an executive at real estate developer Legacy Partners who is waiting for his home purchase in Newport Beach to close.