Saturday, March 26, 2005


House buying: receding dream

Mercury News

Mortgage rates are creeping up slowly but relentlessly, pricing more residents out of the Bay Area's housing market.

Average rates on 30-year mortgages rose above 6 percent this week, for the first time since last summer. And with the Federal Reserve signaling its concerns about inflation, the rates are likely to continue to climb.

That means some residents can't buy houses because they won't be able to afford the higher monthly payments. But in the long term, experts say, the rising rates may finally slow sales and prices in the region's overheated real estate market.

``It will turn into more of a buyers' market than a sellers' market,'' said Renee Morgan of Princeton Capital in Los Gatos. ``It's brutal for the buyers right now. . . . They get beat up and they want to back out.'' Buyers routinely face competition from five, 10, even 20 other people wanting to buy the same property, she said.

According to a weekly survey from Freddie Mac, the country's second-largest source of mortgage financing, the national average rate for a 30-year fixed mortgage this week was 6.01 percent. It's the first time since July that the average has exceeded 6 percent.

The 6 percent mark is ``a bit of a psychological barrier'' because rates have rested below it for so long, said Greg McBride, a senior financial analyst at, which tracks loan rates weekly.

The Fed has been raising the federal funds rate since last summer, he said, resulting in rising rates for shorter-term loans, such as most adjustable-rate mortgages. For example, the interest rate for a one-year adjustable loan this week was about 5.5 percent, according to Bankrate -- about 2 percentage points higher than a year ago. And 30-year loan rates are now climbing, too.

``So home buyers really don't have anywhere to hide,'' McBride said.

One of Morgan's clients, a single teacher, has a maximum purchase price of slightly more than $300,000, but the would-be buyer keeps getting outbid. Even Morgan's repeat buyers are sensitive to rising long-term rates.

``I have seen a couple of borrowers, initially when they met with me, they wanted a 30-year fixed rate,'' she said. ``Now they're in contract, and they're opting for a five- or seven-year adjustable because the payments are less.''

The rising rates could also hit some residents who already own homes.

With Bay Area home prices rising steeply over the past two years, most buyers have opted for adjustable-rate mortgages -- often with the option of ``interest-only'' payments -- to ensure affordable monthly payments.

In the first two months of 2005, 82 percent of people who bought homes in the nine Bay Area counties and Santa Cruz County got adjustable-rate mortgages, according to DataQuick Information Systems. But buyers who chose a one-year adjustable last year could be facing payment shocks when their loans adjust for the first time this year, McBride said.

Last spring, a buyer with a $450,000 loan at 3.47 percent had a monthly payment of $2,013.17. This year, with the increase capped at a typical two percentage points, the rate would be 5.47 percent, and the monthly payment would be $2,531.76.

``And you're not done,'' McBride said, ``because this time next year it's likely to adjust again.''

Initially, increasing rates often prompt buyers who've been casually looking for homes to get serious and buy quickly, said Robert Kleinhenz, an economist with the California Association of Realtors.

Kleinhenz said sales counts will probably rise throughout the spring, despite the rate increases, simply because the spring and summer always see more sales than in the first quarter.

But, he said, ``all else being equal, with these higher interest rates, we should expect to see lower sales compared to last year.''

Loan broker Doug Jones of Mortgage Magic in San Jose says he thinks a big pool of homes could hit the market this year, especially as many homeowners with lots of equity in their homes think to themselves, `` `If I don't get this house sold, rates may go up and I may not have the qualified buyers.' ''

Jones is among those who thinks rates have finally begun the steady upward climb that economists have forecast for the past two years, but which have failed to materialize. Perhaps until now.


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