Surging interest rates could slow housing’s recovery | Katonah Real Estate

A sharp rise in mortgage rates is threatening to slow the momentum that has driven the housing market sharply higher in the past year.

 

Rates on a 30-year fixed mortgage have spiked in the past two months as the Federal Reserve signaled the coming end of a massive bond-buying program designed to stimulate the economy by keeping rates low.

 

Someone who today takes out a $220,000 loan — the median sale price for a traditional home in the Twin Cities — will pay at least $100 per month more on the mortgage than someone who locked in an interest rate on May 1.

 

“It’s been a pretty impressive increase in rates,” said Keith Gum­binger, vice president of HSH.com, a mortgage information firm. “If that increases monthly payments by, give or take, 10 to 15 percent, it wouldn’t be unreasonable to see sales back off by perhaps that much.”

 

U.S. home prices were up 12 percent in May from a year earlier, and Twin Cities prices were up 14.8 percent, in part thanks to demand fueled by rock-bottom ­interest rates. Since home purchases often translate into sales of garden hoses, lawn mowers and washing machines, as well as construction jobs, the likelihood that rates will continue to rise should temper economic growth.

 

The irony is that what’s driving up rates is, ultimately, an improving economy. Rates are as low as they are because the Federal Reserve has been buying $85 billion in mortgage-backed securities per month, a program known as quantitative easing that’s meant to stimulate borrowing.

 

The Fed’s purchases create demand for mortgage-backed securities and so drive down interest rates for borrowers. The strategy has been effective. Rates for 30-year mortgages were as low as 3.3 percent in November, a number that inspires awe in anyone who took out a mortgage in decades past.

 

But rates started to rise in mid-May when Fed Chairman Ben Bernanke first hinted in a Congressional hearing that the economy might be strong enough for the central bank to contemplate slowing its asset purchases. After a Bernanke news conference on June 19, rates on a 30-year fixed mortgage rose from 4 percent to 4.6 percent in five days, while the stock market faltered.

 

Surging interest rates could slow housing’s recovery | StarTribune.com.

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