Posted on: Friday, August 8, 2003

Rising mortgage rates may be long-term trend

By Deborah Adamson
Advertiser Staff Writer

After thinking about refinancing for months, Dan and Kathy Uchida finally went ahead and did it.

Last week, the Uchidas locked in a 5.5 percent rate for a 15-year mortgage. It was good timing, too. After hitting their lowest levels in half a century, mortgage rates have risen sharply in the past month, and the forecast calls for further increases.

"I'm glad we got there in time," said Kathy Uchida, a teacher.

As of Wednesday, the average 30-year fixed-rate mortgage in Hawai'i hit 6.15 percent, up nearly 1 percent in a month and the highest rate since October, according to the Honolulu Board of Realtors.

The average 15-year reached a one-year high of 5.63 percent, up nearly 1 percent in a month, and the one-year adjustable rate mortgage was 4.35 percent, a four-month high.

"It looks like they bottomed out a month or two ago and they're heading up," said Harvey Shapiro, Honolulu Board of Realtors economist.

Nationally, the 30-year fixed-rate mortgage rose to an average 6.34 percent, the highest rate in a year, according to Freddie Mac. The 15-year rate rose to 5.66 percent, a 10-month high. The one-year ARM hit 3.8 percent, the highest since April. These rates charge an average 0.7 point. (A point is 1 percent of the value of the mortgage loan.)

"Signs that the economy is finally improving has generated upward pressure on fixed-rate mortgages over these past few weeks," Frank Nothaft, chief economist for Freddie Mac, said in a statement.

Mortgage rates follow the movement of the Treasury market, which are government IOUs in the form of T-bills, notes and bonds. When the economy improves, there's anticipation of higher interest rates coming to cool down the economy. Bond prices tend to fall and yields rise. Higher yields boost mortgage rates.

"The bond market likes doom and gloom," said Peter Heinen, loan officer at HomeStreet Bank in Honolulu. "When (the economy) looks better, bonds sell off" and rates rise.

Also boosting bond yields were federal budget deficit concerns and Wall Street disappointment that the Federal Reserve didn't cut interest rates more deeply in June.

Refinancing slows

Despite what homeowners might believe, the Fed does not cut mortgage rates. The nation's central bank manipulates short-term rates, chiefly those banks charge each other for overnight borrowing. But the Fed's signals on the economy do affect mortgage rates.

With rates rising, refinancing activity has begun to cool off.

"Activity has somewhat slowed down," said Russell Miyashiro, senior vice president, residential loans, at Finance Factors. Those people who kept waiting for rates to fall further "are in shock."

Paul Andes, a senior vice president at Hawai'i Home Loans, said "a lot of people were spooked by it, and people who were sitting on the fence locked in their rates."

Heinen said the volume of phone calls about refinancing has fallen by half. His workload has lightened, so he can take Saturdays off.

Nationally, refinance activity has fallen this week to 58.3 percent of all mortgage applications, from 60.4 percent in the previous week, according to the Mortgage Bankers Association of America.

But the climbing rates probably won't slow the housing market, Heinen said. Unlike refinancing candidates, homebuyers aren't motivated just by interest rates.

Rate forecast mixed

Historically, mortgage rates have to hit about 8 percent for home sales to start cooling down, Shapiro said. But the way Hawai'i's housing market has soared, he's not sure buyers will be deterred by 8 percent.

For the rest of the year, Andes and Miyashiro forecast higher rates.

"Rates aren't going to be where they were before," Miyashiro said. "There's a strong possibility they will go up much higher."

Andes said "if the (health of the) U.S. economy is any indication, mortgage rates may start to drive upwards by the end of the year."

Heinen doesn't agree. The current increase in rates comes from a perception that the economy is improving, he said.

"I don't see any change in the economy," he said. "I think mortgage rates will be lower."