Monday, April 17, 2006

Key interest rate index up

The global bond market sent an unmistakable message to the U.S. real estate market last Thursday: 10-year Treasury notes, the key index used by American lenders to price 30-year home mortgages, jumped past 5 percent for the first time in nearly four years.
That means that mortgage rates are virtually certain to rise beyond where they were earlier last week -- 6.5 percent for conforming 30-year loans, according to the Mortgage Bankers Association of America.
Though the Federal Reserve Board has pushed short-term interest rates up steadily for the past year -- the bank prime is now at 7.75 percent -- long-term mortgage money has remained relatively inexpensive because 10-year Treasury notes remained well below 5 percent. The prime bank rate affects home equity credit lines, which tend to float at 1 or 1.5 percent above the prime, but has no effect on 30-year mortgage rates.
The reason for the big gap between long-term and short-term rates, according to money market analysts, has been that demand for super-secure 10-year Treasury notes by banks and investors in China, Japan and other Asian economies with huge trade surpluses kept rates unusually low. Some of that demand may now be slackening while at the same time the U.S. economy appears to be heating up—forcing long-term Treasury rates to rise.
The upshot for homebuyers for the summer months: Get adjusted to the idea of conventional mortgage rates jumping from 6.5 percent to 7 percent and maybe beyond. Higher rates, in turn, will put a further damper on home price appreciation, so sellers and their agents should set asking prices with the cost of money in mind if you want to sell property within a reasonable amount of time after listing.
Moderately higher rates may be just what the doctor ordered to restore affordability in high-cost, high-froth markets on the West and East coasts. According to the National Association of Realtors, the median-income household in the Western region of the U.S. can only afford 81 percent of the median-priced house in the region.
Freddie Mac's chief economist, Frank Nothaft, said last week that rising rates will help "deflate some of the affordability pressures as house price growth moderates to the single digits." The cooling of once-sizzling markets is already well underway, even without significant increases in rates. The increased interest rates may put a chill on Northern California properties.


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