Buy That Home Before Mortgage Rates Go Up

July 2 -- — As most Americans know, thanks to low interest rates, there has not been a better time to buy or refinance a home in years. And Americans, not averse to a good deal, have been buying and refinancing in record numbers.

But, the question is, for how much longer?

Even though there are still concerns about the short-term health of the economy, in the long term, with the success of the war in Iraq and the passage of the president's tax-cut package, investor confidence appears to be on the upswing. That's good news for the stock markets but not such good news for the real-estate market.

In other words, if you are still thinking about buying or refinancing, you better get on it.

That's because many economists — such as Lawrence Yun, senior economist at the National Association of Realtors, and Celia Chen, director of housing economics at Economy.com — predict that when the Federal Reserve finally does raise interest rates in reaction to a growing economy, and when mortgage rates climb past the 6 percent mark, real estate will become less affordable, and the housing market will slide into stall.

Home shoppers may have less than a year to take advantage of home-buying opportunities before mortgage rates rise again. "We see mortgage rates rising once there are firm signs of an economic recovery," says Yun. "We see rates starting to move, albeit modestly, by late summer. Currently at 5.4 percent, mortgage rates could be up to 6 percent by the year's end."

Timing a Slowdown

For homeowners, that could mean that after three years of 6 percent and 7 percent home-price appreciation rates, home prices will likely return to a 4 percent-plus appreciation rate.

While history tells us that a drop in the housing market is inevitable following a real estate boom, the only question is how fast and how far the drop will be. Some economists predict it will happen quickly, in which case home values will suffer major declines. (Since the average appreciation rate is about 4 percent, if the figure falls below 4 percent, it's significant. If the price actually declines, it's disastrous.) In the International Monetary Fund's World Economic Outlook report published in April, for example, the housing bubble was cited as one of the many "threats" to the world economy in the next year.