Improving economy sends rates higher

By Thomas A. Fogarty
USA Today

Historic low mortgage interest rates are fading in the rearview mirror. Blame an improving U.S. economy.

Mortgage investment giant Freddie Mac reported last week that the average 30-year home financing carried a 7.08 percent interest rate. It's the first time in five weeks the rate has ticked above 7 percent. And it's a long way from early November, when the rate sank to 6.45 percent, a three-decade low.

Experts say borrowers should expect modestly higher mortgage rates for the rest of 2002.

Keith Gumbinger of mortgage tracker HSH Associates says the 30-year rate may spike briefly to 8 percent this year. Says Gum-binger: "If I were planning to buy a house next summer, I'd use 7.5 percent as my working number."

Reacting to positive economic news, bond traders pushed the yield on the 10-year Treasury note last Thursday to 5.41 percent, an eight-month high. Driving the increase is a string of favorable economic indicators that suggest an expanding economy, declining unemployment and improving productivity.

Freddie Mac economist Robert Van Order says bond traders appear confident that inflation is under control. As a result, he says, mortgage rates likely will increase gradually. He looks for the 30-year rate to remain under 7.5 percent for the balance of 2002. But even a gentle rise in mortgage rates will have consequences. Among them:

• A decline in mortgage refinancing. The Mortgage Bankers Association of America reported a 24 percent decline last week from the previous week in applications for refinancing.

• Fewer home sales. Freddie Mac's Van Order says the record high sales volumes for new and existing homes in 2001 are unlikely to be topped this year.

• More adjustable rate mortgages. More borrowers will be willing to trade the security of a fixed interest rate for lower initial financing costs.