Mortgage rates leap; 30-year at 4.46%, highest since 2011

A for-sale sign stands in the yard of a home in Glenview, Ill. Average U.S. rates on 30-year fixed mortgages surged this week to the highest levels in two years, the biggest one-week increase in 26 years.
A for-sale sign stands in the yard of a home in Glenview, Ill. Average U.S. rates on 30-year fixed mortgages surged this week to the highest levels in two years, the biggest one-week increase in 26 years.

Mortgage rates for 30-year U.S. loans surged this week to the highest level in almost two years, increasing borrowing costs at a time when the housing market is strengthening and prices are jumping.

The average rate for a 30-year fixed mortgage rose to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, Freddie Mac said Thursday. The rate was the highest since July 2011 and above 4 percent for the first time since March 2012. The average 15-year rate climbed to 3.5 percent from 3.04 percent. Freddie Mac is the Federal Home Loan Mortgage Corp.

The increase, sparked by expectations that the Federal Reserve will scale back bond purchases, provides a test for a year-long housing recovery that’s been fueled by home loan costs near record lows. Buyers seeking to take advantage of low rates are competing for a tight inventory of listings, driving up values. House prices in 20 U.S. cities rose 12 percent in April, the biggest year-over-year gain since March 2006, according to S&P/Case-Shiller data released this week.

Higher mortgage rates are “not going to snuff out the housing recovery,” said Paul Diggle, property economist for Capital Economics. “But it’s another reason to expect a slowdown from the very rapid rate of price rises of late.”

Capital Economics on Wednesday increased its 2014 mortgage-rate forecast for 30-year loans to 5 percent from a previous estimate of 3.75 percent. The rate, which has jumped from 3.35 percent in early May, leapt after Federal Reserve Chairman Ben Bernanke said last week that policymakers may slow bond purchases this year should the economy continue to show improvement.

At the current average interest rate, the monthly payment on a $300,000 30-year loan has increased to $1,513 from $1,322 in May.

Prospective homebuyers may be rushing to make deals. Contract signings to buy previously owned homes climbed 6.7 percent in May to a six-year high, suggesting rising mortgage rates may be providing a “spark,” the National Association of Realtors said Thursday.

Borrowing costs are still relatively low. The average rate for a 30-year mortgage over the past 10 years is 5.31 percent, according to data compiled by Bloomberg.

During the housing market’s boom, existing-home sales reached a peak annual pace of 7.25 million in September 2005 with 30-year mortgage rates at about 5.8 percent. Home sales last month, with rates below 4 percent, were at a pace of 5.18 million.

“While rising interest rates will reduce housing demand,rates would have to increase considerably more before the reduction in demand for home purchases would be substantial across the country,” Chief Economist Frank Nothaftwrote.

The increase “will not meaningfully impact the fundamental recovery in demand because affordability remains high relative to history,” Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities, wrote Wednesday in a note to clients. “Rates are also rising partly because of expectations of an improving economy. Hence, rising job and income prospects will offset some of the now-higher mortgage financing costs.”

Banks also may help offset the rate increase by loosening underwriting standards as rising prices reduce the risk of making new loans and a slowdown in refinancing makes lending to homebuyers more attractive. An index released this week by the Mortgage Bankers Association shows credit availability has eased since last year.

The bankers group’s index of home-loan purchase applications increased 2.1 percent in the week ended June 21, while its refinancing measure fell 5.2 percent to the lowest level since November 2011. The share of applicants seeking to refinance was 67.3 percent, the lowest since July 2011, the Washington-based trade association reported Wednesday.

Higher rates are a sign that the economy is becoming healthier, Stuart Miller, chief executive officer of Miami-based Lennar Corp., the third-largest homebuilder, said on a conference call this week.

“Interest rates are moving higher in the context of economic improvement,” Miller said. “We’re looking at a supply shortage, so that means that even in the context of rising rates and a better economy, we’re likely to see price increases and rental increases.”

Front Section, Pages 1 on 06/28/2013

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