Rates hit a two-year high and are expected to edge higher. That could slow the home sales boom.
Average interest rates for 30-year, fixed-rate mortgages climbed above 8 percent Tuesday, according to the surveys of financial publisher HSH Associates. That's the highest level since June 1997 and some economists expect rates to creep even higher.
Although 8 percent is still low by historical standards, the rising rates could slow the unprecedented boom of home sales by pricing some buyers out of the market, predicted Gopal Ahluwalia, director of research for the National Association of Home Builders. "There are definite worries if the interest rates continue to increase," Ahluwalia said.
And in the short-term, rate increases are likely, market watchers say.
"We are probably going to dance right around 8 percent," said Keith Gumbinger of HSH Associates in Butler, N.J. But the rates could go even higher and fast if there are signs that inflation is increasing _ such as a report that labor costs are rising, for instance.
"We could reach 8\ (percent) easy," Gumbinger said. Rates already have climbed more than 1 percent in the past three months.
"Our attitude about interest rates is that they will go higher," said Kevin Kennedy, vice president of Market Street Mortgage of Clearwater.
Mortgage interest rates are increasing for two reasons, analysts say. First, mortgage rates tend to climb in anticipation of interest rate increases by the Federal Reserve Board and chairman Alan Greenspan has made noises that another rate hike is likely at its Open Market Committee Meeting on Aug. 24. The board raised rates a quarter point on June 30 and mortgage interest rates rose before that move, but then steadied until the market got wind a week ago that another rate increase may be in the cards because of Greenspan's inflation fears.
A second reason rates are rising is an increase in the number of Treasury bonds, which are backed by mortgages, up for sale. The supply is outstripping demand and that means the interest rate for the securities must climb to entice investors to buy them, Gumbinger said.
Many mortgage watchers suggest that home buyers lock in a mortgage rate now.
"If you haven't already, you might as well," Gumbinger said. "The odds don't favor a drop and you stand to lose more than you stand to win. . . . It's a summer of nervousness."