Mortgage rate rise pressures housing recovery

NEW YORK (CNNMoney.com) -- Mortgage rates went up again this past week, putting more pressure on a weak housing market and further dimming prospects for a quick recovery.

Low rates helped create and sustain the last housing boom. And rates remained manageable over the past two years as the market fell, buoying prices and enabling the bubble to deflate gradually rather than with a sharp pop.

But now, rates on a 30-year, fixed-rate mortgage, which have floated in a narrow range of 6.14 percent to 6.34 percent all year, have begun a steady rise. Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), expects them to top out near 7 percent by the end of the year.

Rising rates, among other factors, have caused the MBA and the National Association of Realtors to push back their forecasts for a home-price recovery. Both groups are now looking to early 2008, compared with a previous outlook for mid-2007.

On Thursday, Freddie Mac (Charts, Fortune 500), the government-sponsored buyer of mortgage loans, reported that the interest rate on the average 30-year fixed had moved up to 6.42 percent, the survey's highest level since August, 2006.

Mortgage rates are based on the yields of 10-year Treasury notes, which have also risen substantially this month, as strong global stock market returns have lured investors away from bonds, lowering their prices.

Robust economic growth outside of the housing market with healthy consumer and improving business spending has added to strong interest rate increases, according to a statement from Frank Nothaft, Freddie Mac's chief economist.

When interest rates rise, they add to the size of a borrower's monthly mortgage payment. Rates had been at 6.16 percent as recently as May 3. The 0.26 percent increase since then represents a jump of $30 a month on a $200,000 loan.

Buyers look carefully at monthly payments to gauge a home's affordability. Higher monthly costs can limit the amount they can offer for a home.

And if rates do go as high as 7 percent, that could have a substantial impact on buying patterns, according to Keith Gumbinger of financial publisher HSH Associates, which tracks the mortgage industry.

"It would make it more likely that [buyers] would sit on the sidelines," he said. "That would put downward pressure on housing prices."

Industry experts have been looking to the Federal Reserve to see where mortgage rates are headed. So far, however, the Fed appears to be sitting tight.

"The Fed is probably set for the next 12 months," said Michael Marriott, managing director of Credit Suisse, before a session to discuss the state of the mortgage lending industry at the MBA's National Secondary Market Conference & Expo in New York last week.

According to Marriott, however, the worse the housing market gets, the more likely the Fed will begin aggressively cutting rates.