Fixed mortgage rates rise sharply

Mortgage rates spiked this week, even as the real estate outlook grew more dismal.

Most of the past week's rate rise occurred last Thursday, two days after the Federal Reserve cut short-term interest rates, as investors lost sleep over the effects of the falling dollar. The most important consequence was a rise in oil prices: Oil futures approached $84 per barrel. When the dollar loses value in relation to other currencies, imports become more expensive and upward pressure is exerted on prices and interest rates.

The benchmark 30-year fixed-rate mortgage rose 17 basis points, to 6.49 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.37 discount and origination points. One year ago, the mortgage index was 6.29 percent; four weeks ago, it was 6.43 percent.

The benchmark 15-year fixed-rate mortgage rose 16 basis points, to 6.16 percent. The benchmark jumbo 30-year fixed went up 8 basis points, to 7.31 percent. Adjustable-rate mortgages went the other way, with the benchmark 5/1 ARM falling 6 basis points, to 6.35 percent.

Madonna and housing

"I saw the Fed dropped the rate, then I saw the dollar get weak," says Bob Moulton, president of Americana Mortgage Group in Manhasset, N.Y. "Then I saw this big migration to gold on Thursday. That means people are worried about inflation. When you see concern about inflation, that's what causes rates to rise."

Inflation might affect just about everything but houses. From a national perspective, the real estate market is moribund and will need a long time to recover. According to the National Association of Realtors, there were 10 months' worth of houses and condos for resale at the end of August. Think back to when Madonna's "Like a Prayer" was a hit -- the spring of 1989 -- and that's the last time the housing inventory was this high.

The weird thing is that year-over-year house prices didn't fall. Half of the houses resold in August cost more than $224,500; that's $500 more than the median price in August 2006, when the housing supply was a less-dire 7.3 months.

The National Association of Realtors theorized that home sales declined in August because of problems in the jumbo mortgage market. Jumbo loans are mortgages for more than $417,000, and a liquidity crisis caused jumbo rates to skyrocket at the beginning of August. This resulted "in a fairly high number of postponed or canceled sales, with many buyers having to search for other financing when loan commitments fell through," the NAR's senior economist, Lawrence Yun, says.

Whither prices?

But if there had been a drop in sales of expensive houses, you would expect median prices to fall, too. But they didn't, at least in the Realtors' survey.

Things looked different in another survey of house prices, called the S&P/Case-Shiller Home Price Index. That survey of 20 metropolitan areas found a price decline of 3.9 percent in the 12 months that ended in July.

None of this is good news for home sellers. As for the other side of the equation ...

"The abundant choice of homes is permitting buyers to better negotiate price and terms," says the president of the NAR, Pat V. Combs. "There are good opportunities in the market now, especially for first-time buyers."

And those opportunities might get even better a few months from now.