Mortgage Rates On The Rise

The housing market has one more hurdle to overcome. Mortgage rates continue to rise, though they remain near historic lows. The increase, however, makes homes that much less affordable.

The average rate for a 30-year fixed rate mortgage was 5.05 percent in the week that ended today, according to Freddie Mac. That's up from 4.81 percent the week before.

In a separate report, the online lender LendingTree.com reports the average 30-year rate was even higher, rising to 5.31 percent in the last week.

"Long-term bond yields jumped on positive economic data reports, which placed upward pressure on mortgage rates this week," said Frank Nothaft, vice president and chief economist, Freddie Mac.

An improving economy hurts

Increasingly bullish economic indicators have been another factor. For all of 2010, nonfarm productivity rose 3.6 percent, the most since 2002, while January's unemployment  rate unexpectedly fell from 9.4 percent to 9.0 percent. Meawnile, the service industry  expanded in January at the fastest pace since August 2005.

"As a result, interest rates on a 30-year fixed-rate mortgage rose to the highest level since the last week in April 2010," Nothaft said.

"While the recent drop in the unemployment rate is considered good news, it will adversely affect borrowers as evidenced by the recent rise in bond yields," said Cameron Findlay, LendingTree Chief Economist. "For borrowers, this is a double-edge sword. Improvement in the economy from reduced unemployment will translate into higher borrowing costs via higher rates as investors shed bonds caused by fear of inflation, eroding the fixed coupon payments from those investments. Homebuyers and homeowners who are able to refinance should take this into account as they plan their next steps."

Mortgage applications drop

With rates on the increase, it's not surprising that fewer people are seeking mortgages. In its weekly report, the Mortgage Bankers Associaiton (MBA) reports its measurement of application volume fell by 5.5 percent in one week, on a seasonally adjusted basis.

"Refinance volume continues to be low, as fewer homeowners with equity have any incentive to refinance," said Michael Fratantoni, MBA's Vice President of Research and Economics. "We are at the beginning of the spring buying season, but purchase volume remains weak on a seasonally adjusted basis."

While rates are going up, Realtors like to point out they are still quite low, even compared to just a couple of years ago. But as the interest rate rises, so does the monthly payment. Therefore, rising interest rates do not bode well for home appreciation, since buyers will be looking for lower prices, to keep their payments affordable.