Rising Mortgage Rates Stir Housing Worries

Rising mortgage rates are renewing concerns among investors, who this week drove down the stocks of real estate-related companies amid concerns that higher rates could hamper the nation’s sizzling housing boom.

Steady rate jumps in recent weeks are already prompting inquiries from homeowners worried about possible hikes in their monthly mortgage payments, some loan brokers said Friday.

But mortgage lenders and other industry officials say they aren’t overly concerned because they have expected higher rates for some time and have plans to cope with any interest shocks.

Investors and others worried about recent rate increases “are so short-term focused, it’s unbelievable,” said Michael Perry, chief executive of mortgage lender IndyMac Bank in Pasadena. Because IndyMac sells most of its loans, his company holds little interest-rate risk, he said.

Long-term mortgage rates have risen five weeks in a row, while short-term adjustable-rate mortgages are at their highest levels in more than three years, according to data released Thursday by mortgage purchaser Freddie Mac.

The average rate on 30-year mortgages hit 5.82% this week, up from 5.77% last week and the highest since the week of April 14, when the average was 5.82%. A year ago, 30-year mortgage rates averaged 5.99%.

One-year Treasury-indexed adjustable mortgages averaged 4.47% this week, up from last week’s 4.46% and the highest since the 4.5% average in the week ended July 19, 2002. A year ago, they averaged 4.08%.

The rates have jumped in step with rising yields on Treasury securities, pushed up by concerns that stronger economic growth could boost inflation and prompt further rate hikes by the Federal Reserve. The Fed is expected to boost its benchmark short-term rate Tuesday for the 10th time in just over a year.

On Friday, after the release of a stronger-than-expected job report, the yield on the 10-year Treasury note jumped to a nearly four-month high of 4.39%.

That triggered another sell-off in real estate-related stocks. For example, shares of D.R. Horton Inc., the nation’s largest home builder, tumbled 5% on Friday. Stocks of mortgage lenders and real estate investment trusts also sagged. An index of housing stocks is off 6.5% from its all-time high a week ago.

Rising mortgage rates are seen as one of the key bugaboos for the 5-year-old housing boom, kept alive partly through the proliferation of exotic mortgages such as “interest-only” and hybrid adjustable-rate loans.

Higher interest rates could cause payments on these loans to rise, straining borrowers and triggering possible defaults.

But some industry experts and economists say mortgage rates are still near historic lows and can rise much higher before causing serious problems. Even with recent rises, long-term mortgage rates are still lower than in June 2004, when the Fed started raising rates.

“We expect demand to continue as higher wages and income levels mute the effect of gradually rising interest rates,” Banc of America Securities analyst Daniel Oppenheim wrote in a research note Friday.

Freddie Mac expects home sales to hit a new record again this year, as relatively low fixed mortgage rates, combined with so-called teaser discounts on adjustable-rate loans, help maintain affordability even as home prices rise.

Many homeowners also refinanced existing loans on more favorable terms during the second quarter, when 30-year mortgage rates dipped to their lowest level in 14 months.

Freddie Mac economist Frank Nothaft expects rates on 30-year fixed mortgages to rise through year-end, with a fourth-quarter average near 6% -- a quarter of a percentage point higher than the second-quarter average. However, rising rates should start to damp enthusiasm in the market later this year, Nothaft said earlier this week.

West Los Angeles mortgage broker Mitch Ohlbaum said Friday that he had been fielding more calls in recent days from clients concerned about how rising rates will affect their loan payments. Prospective home buyers also are concerned that higher rates will make purchases more costly, he said.

Homeowners with home equity lines of credit, which are tied to short-term rates, are starting to see their payments increase, in some cases by 45% over the last year, Ohlbaum said.

“People are calling and saying ‘I’m nervous because the Fed keeps raising,’ ” he said.

Ohlbaum, who owns Legend Mortgage Co. in Los Angeles, expects rates on 30-year fixed mortgages to dip again before the Fed finishes hiking short-term rates. He is telling clients to pick loans with at least a 10-year fixed period, because anything shorter will mean higher payments sooner.

Borrowers “need enough time to get past the next cycle,” he said. “Rates are only going to keep rising and homes won’t be appreciating as much.”