Mortgage rates spike; home builders index at record low

— -- The news was not good for home buyers or builders Thursday: Mortgage rates spiked and the National Association of Home Builders says its housing market index hit a record low.

The average interest rate on a 30-year, fixed mortgage reached 6.46% this week, up from 5.94% the week before, Freddie Mac reported Thursday –– biggest weekly jump since 1987.

The sudden spike in mortgage rates could jeopardize any turnaround in the housing market as buyers face steeper loan costs, an increase attributed to lenders' fears of a deepening recession.

Other measures showed similar increases:

• The Mortgage Bankers Association said Wednesday that its average interest rate for 30-year fixed-rate mortgages increased to 6.47% from 5.99%.

• Bankrate.com says its benchmark 30-year fixed-rate mortgage average rose 54 basis points to 6.74%, according to its national survey of large lenders — biggest weekly rise in the Bankrate.com index in more than 21 years. A basis point is one hundreth of a percentage point.

That all means borrowers are paying more for loans. On a $165,000 loan, a borrower would pay $1,069. That's $58 more a month than if the buyer had locked in the same loan last week.

Behind the rise:

• The financial bailout. The government's $700 billion rescue plan means the Treasury is borrowing more money, putting upward pressure on long-term rates. That, coupled with fears about inflation, mean rates could continue to rise as high as 7%.

"There's an expectation that (longer-term) rates will continue to go up because we have to borrow $700 billion to pay for this bailout," says Joel Naroff, of Naroff Economic Advisors. "If we are headed into an even worse recession than we thought, it only makes sense for financial institutions to price based on risk."

Yields on 10-year Treasury notes rose to more than 4% from 3.5% the week before, and those yields influence mortgages rates.

•Gloomy economic news. Lenders are demanding higher returns as risk rises in the turbulent financial environment.