Rise in mortgage rates cuts into home buyer demand

NEW YORK Wed Jul 3, 2013 11:59am EDT

An empty post where a ''for sale'' sign used to hang is seen outside a home in Brentwood, New York February 10, 2012. REUTERS/Shannon Stapleton

An empty post where a ''for sale'' sign used to hang is seen outside a home in Brentwood, New York February 10, 2012.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - Expectations the Federal Reserve will slow its economic stimulus program by the end of the year pushed mortgage rates higher last week, sapping demand from potential home buyers, data from an industry group showed on Wednesday.

Rates measured by the Mortgage Bankers Association jumped to the highest level since July 2011, which also cut into refinance activity. The share of refinance applications fell to the lowest level in more than two years.

Interest rates on fixed 30-year mortgage surged 12 basis points to average 4.58 percent in the week ended June 28, the MBA said.

"At these rates, many fewer homeowners have an incentive to refinance," Mike Fratantoni, MBA's vice president of research and economics, said in a statement.

"Purchase application volume also declined, but not nearly to the same extent, as affordability remains strong."

However, a separate report from mortgage financier Freddie Mac, covering the week ending July 3, showed average rates for 30-year mortgages heading slightly lower. Market concern about an early reduction of Fed stimulus eased somewhat during the period, an economist said.

Rates have been rising since early May, with the increase accelerated by comments from Fed Chairman Ben Bernanke last month that the central bank expects to wind down the pace of its quantitative easing program later this year if the economy improves as expected.

The Fed has been buying $85 billion a month in bonds and mortgage-backed assets to keep borrowing costs low and stimulate economic growth. The historically low mortgage rates have helped lure in buyers as the housing market gets back on its feet.

The recent higher cost of mortgages has raised concerns that the increase could dampen demand and slow the housing recovery, though most economists do not expect it to be derailed. Even with the increase, rates remain historically low.

While the rise in rates had appeared to cause some potential buyers to get into the market earlier in June, MBA's seasonally adjusted index of loan requests for home purchases decreased 3.1 percent last week.

Refinancing activity was hit much harder and the index tumbled 15.6 percent last week. The refinance share of total mortgage activity slumped to 64 percent of applications from 67 percent the week before. It was the lowest level since May 2011.

The overall index of mortgage application activity, which includes both refinancing and home purchase demand, slid 11.7 percent.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

The Freddie Mac report showed average 30-year fixed rate mortgages for the week ending July 3 falling to 4.29 percent from 4.46 percent last week. At this time last year the rate averaged 3.62 percent.

The Primary Mortgage Market Survey also showed that the 15-year fixed-rate mortgage averaged 3.39 percent this week, down from last week's average of 3.50 percent.

"Fixed mortgage rates fell over the holiday week as market concerns over the timing of the Federal Reserve's pullback in bond purchases eased somewhat," said Frank Nothaft, vice president and chief economist for Freddie Mac.

(Reporting by Leah Schnurr; Additional reporting by Paige Gance; Editing by Diane Craft and Kenneth Barry)

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Comments (5)
Vuenbelvue wrote:
A acquaintance had a mortgage and a small lien representing a consolidation of credit cards bills 6-7 years ago by old Home Finance Credit Company at a murderous interest rate of 11%. Finally the person refinanced and closed in June, after 34 months and 3 different applications with three different mortgage companies at a 4% rate. All the while the government said they are helping these people. I hate to see what happens if they weren’t helping. A 4.58% 30 years is a great mortgage rate. 6% used to be great pre-2006.

Jul 03, 2013 7:43am EDT  --  Report as abuse
forteinjeff wrote:
What’s all this hoop-la over the interest rates going up, up, up? Come on here folks, we’re talking about less than 5% money on a 30 year loan. Wasn’t anyone alive during the wonderful Reagan era when we saw 10% and higher mortgages a typical house loan? As long as we see interest rates at less than 6%, I consider ourselves lucky. What still has me worried are the borrowers who are going in with 10% or less as a down payment. We need to make sure the borrowers REALLY have the credit score and secure income to honestly qualify for the loan. One other thing: Don’t buy as much house as you can qualify for. Buy as much house as you can safely afford. At the rate we’re seeing ALL taxes & inflation go up, I wouldn’t sign a loan that ate more than 20% of my net monthly income, then then accept no home is perfect and stay put where you’re at.

Jul 03, 2013 9:56am EDT  --  Report as abuse
Kimy wrote:
Interest rate going up in the DC area is a BIG deal because 1/2 point means $20,000 less buying power. Yes, in the Reagan era interest rate for a 30yr loan was near double digit but houses back than did not cost 500K or more either.

Jul 03, 2013 1:47pm EDT  --  Report as abuse
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