Home Buyers: A Borrowed Dime Grows More Costly

By Nell Henderson
Washington Post Staff Writer
Sunday, June 17, 2007

The price of money has gone up.

Or more technically, long-term interest rates have jumped in recent weeks, rattling the already slumping housing market.

When potential home buyers call for mortgage rate quotes these days, "they're shocked; they almost don't believe you," said Jim Foley, senior vice president of George Mason Mortgage. "They're quick to get off the phone to make more calls."

The average rate on a 30-year, fixed-rate mortgage rose to 6.74 percent last week, up more than half a percentage point in four weeks, from 6.21 percent, according to mortgage financier Freddie Mac. That would boost the monthly payment on a $400,000 mortgage by $139.

Underlying the jump in interest rates was a shift in sentiment in the financial markets. Early this year, many investors worried about a possible recession, causing rates to fall. More recently, they have concluded that strong U.S. and global economic growth will sustain inflation pressures in the months ahead, pushing rates higher.

Consumers are also paying higher rates on new home-equity and auto loans than they would have two weeks ago. Many companies are facing higher borrowing costs.

Investors holding bonds purchased a few months ago have seen their prices drop, but they can now buy new bonds paying higher yields.

And rising interest rates tend to hurt the stock market, as they did two weeks ago. Stock prices battled back late last week, but investors are still worried that higher borrowing costs will squeeze company profits and that bonds will become a more attractive alternative.

Money is still relatively cheap by historical standards. But the recent increases have stunned borrowers accustomed to easy money in recent years.

The big question for many consumers and investors is where interest rates are headed. If they keep rising, that would likely prolong and deepen the housing slump, cool the stock market and slow the economy.

Already, local real estate professionals say, some home buyers have rushed to lock in mortgage rates before they move higher. Others are holding off in hope that rates will come back down.

Economists aren't much help because they are divided between those who expect long-term interest rates to climb higher and those who think they're more likely to settle around their current levels.

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