NEW YORK (CNN/Money) -
The outcome of the Federal Reserve Board's Tuesday meeting could add more fuel to the fire for rising 30-year mortgage rates.
The widely anticipated increase in the Fed Funds rate -- a short-term rate -- doesn't directly affect rates for long-term loans. But eventually, a rising cost of money often lifts all rates.
The average rate for 30-year mortgages which had remained contained for much of the past year, but has again crossed past the 6 percent mark.
In historical context, the rate is still low. The average annual rate in the 1990s was 8.12 percent, according to Freddie Mac. In the 1980s, the rate averaged a whopping 12.70 percent, getting as high as 18.45 percent in inflation-ridden October 1981. The high 30-year rate of the early 1980s contributed to abysmal home sales rates in those years.
But industry experts are keeping an eye on the recent increase.
"Right now, we're seeing upward momentum in long-term rates, especially with new inflation worries," said Daniel Jester, an analyst with Economy.com. "Long-term rates have been so low for so long compared to where they'd normally be in the business cycle -- at some point a correction is necessary."
"The main reason why the 30-year rate stayed low despite the Fed's short-term rate hikes is that people saw inflation as well-contained," said Lawrence Yun, senior economist at the National Association of Realtors (NAR). "Now that inflation appears to be out of its container as a result of energy prices, we are seeing some jumpiness in the long-term rates."
"We expect a very slow climb in the 30-year fixed, to 6.7 percent by the end of 2006," said NAR spokesman Walter Molony.
The pinch of the sixes
As rates rise, so will the prospective home buyers' monthly mortgage payment, and the housing market could cool as it sees fewer potential buyers.
But analysts disagree over what type of rate rises it would take to usher in this scenario.
"The number which we believe will cause tangible cooling is 6.5 percent," said Economy.com's Jester. "But because so many people have already bought into the market, the number could even be a bit lower."
The NAR calculates a monthly Housing Affordability Index -- a measure of how easy it is for a family with a median income to purchase a median-priced home -- with 100 meaning a family has exactly enough income for a purchase.
When mortgage rates rise, the affordability index declines -- a family either needs more income or has to buy a less expensive home.
The NAR's Molony says that the 30-year fixed would have to climb all the way to 8.6 percent to make homes less affordable -- and bring the index down to its median 100.
"Sales should slow a little bit next year, but look at the incredible years we're comparing that to," he said.
The NAR puts the median US home price in August at $219,400. To afford a home at that price with a 30-year mortgage at the current average of 6.03 percent, a home buyer would have to make monthly payments of $1,320.
At a mortgage rate of 6.5 percent, that figure rises to $1,387 a month, pricing a new home out of reach of some salaries.
In addition, the raft of nontraditional mortgage products available for people seeking smaller monthly payments -- interest-only mortgages and option adjustable-rate mortgages -- are becoming more difficult to obtain as interest rates rise.
"We're seeing a tightening up on mortgage terms. In 12 to 18 months, we'll get the first payment shocks from these new types of mortgages," said Nick Retsinas, Director of Harvard's Joint Center for Housing Studies. "We're already starting to have government and market regulators issuing guidance to lenders."
Because lenders have made mortgages more available to people with small down payments, they are likely to encounter increasing defaults in coming months. Loan regulators are concerned that mortgage terms not be too lenient.
Who will feel it first?
When higher 30-year rates do take hold, who will be hurt the most?
"First-time buyers will definitely feel it. In many markets, there's been such upward price pressure that the only way people have been able to get into home is through low rates," said Retsinas.
"I think both people seeking 30-year mortgages and adjustable rate mortgages will be affected by higher rates," said Economy.com's Jester. "The long-term rate rises will make it hard for many home buyers to qualify for a 30-year, and short-term rate hikes will pinch those who want ARMs."
The Federal Reserve last raised the federal funds rate a quarter-percentage point to 3.75 percent on September 20th, and is widely expected to continue with the hikes. (Full story)
Home pricing also continues its miraculous rise -- as indicated by last week's report that 86 percent of California residents could not buy a typical home with a traditional down-payment, according to the California Association of Realtors. (Full story)
With pricing and mortgage rates conspiring against home buyers, it just got a little more difficult to pin down your dream home.
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Mortgage applications fell in early October -- full story here.
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For a look at the risks inherent in new nontraditional mortgages, click here.