WASHINGTON – June 30, 2008 – As if the real estate slump weren’t severe enough – with prices sinking and foreclosures dumping ever more homes on the market – another threat has emerged: rising mortgage rates.

Low rates helped fuel the housing boom, and rates had remained relatively low even after the boom ended more than two years ago.

But now, with rates creeping back up, the wobbly real estate market could be losing one of its last pillars of support. Some experts say they worry that rising rates threaten to prolong the housing crisis.

The average rate on a 30-year fixed-rate mortgage edged up to 6.45 percent last week, according to Freddie Mac, compared with 5.48 percent in January.

“For months, the only thing the housing market had going for it was that mortgage rates were low,” says Greg McBride, senior financial analyst at Bankrate.com. “With them going up to 6.5 percent, it’s like getting kicked when you’re down.”

Higher rates are “clearly a negative for the housing market,” says Michelle Meyer, an economist at Lehman Bros. “It strains affordability, and if mortgage rates were to stay at a high level, home prices would have to fall even farther.”

Mortgage rates have risen, along with other rates, as inflation has emerged as a growing concern in financial markets.

And with the Federal Reserve increasingly concerned about inflation, interest rates, including those for home loans, could rise still higher in coming months.

“In the next three months, I’d see rates rising only slightly, because the concern of inflation is already factored in to where they sit today,” says Cameron Findlay, chief economist at LendingTree.

But in the next six months, Findlay cautions, rates could rise rapidly. “If we don’t have inflation under control by then, and there are still signs of inflation – the dollar’s continuing to be eroded, oil prices are still high – rates are going to be rising faster.”

Still, Findlay and other experts suggest that home prices and credit availability will have more pull in drawing in buyers than mortgage rates will. Historically, he notes, even 7 percent is a relatively low rate.

Scott Lanoff of American Success Mortgage in New York says he expects the average 30-year fixed rate to top out at about 6.75 percent.

He warns, though: “If it keeps going up, it would be devastating. It takes prospective buyers out of the marketplace, not to mention people who want to refinance, since the benefit of refinancing ceases to exist if they can’t get a lower rate.”

Mortgage application figures seem to bear that out: For the week ended June 20, there were 9.3 percent fewer applications on a seasonally adjusted basis than there were a week earlier, the Mortgage Bankers Association reported last week. And there were 12.1 percent fewer refinance applications.

Copyright © 2008 USA TODAY, a division of Gannett Co. Inc., Anna Bahney

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