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.
The stock market and bond rates have been especially volatile. Earlier in the week, the Commerce Department reported that retail sales fell 1.2% in September, biggest monthly decline in more than three years. The job market is also pointing to a recession: the unemployment rate is 6.1%, up from 4.4% at the end of last year.
Rising mortgage rates and borrowers' angst about economic instability pose a risk to the housing market. There is currently a glut of homes and not enough buyers, which has caused home values to plummet.
"Part of the risk now is consumer sentiment," says Alan Steel, generation manager of AOL Real Estate. "There a fear of the unknown."
Some homeowners say they believe the federal bailout is unfair and could backfire if rates continue to climb.
Mike Hogan., 30, of Columbus, Ohio, just refinanced from an adjustable-rate loan to a fixed rate, 30-year mortgage at 6%, and says he's concerned the government bailout may force interest rates higher.
"People have been spoiled with low rates and with higher rates they won't refinance or purchase. And we're paying to help bail other people out," says Hogan, who works in advertising. "It's very frustrating."
Rising mortgage rates also are eliminating some of the growing affordability that has come from falling home prices.
The Home Builders index fell three points to 14 in October after gaining a point in September from August.
Index readings higher than 50 indicate positive sentiment about the market.
The report reflects a survey of 446 of residential developers nationwide, tracking builders' perceptions of market conditions.
Builders' gauge of foot traffic by prospective buyers fell two points to 12, while sales expectations over the next six months plunged nine points to 19.