Real Estate Outlook: Inflation and Mortgage Rates

The national economy keeps plodding along, but even that slow pace is better than what the experts predicted last year — that we’d be knee-deep into a serious recession by now.

Well, we’re not. And top forecast economists like the Mortgage Bankers Association’s Orawin Velz say there’s a good possibility we’ll avoid a significant recession this year, and see much stronger economic growth by early next year.

But there’s also an ominous development taking shape that could spoil that scenario: Interest rates are beginning to spiral upwards on fears of rising inflation.

Core inflation is running at about three percent year over year — the highest rate we’ve seen in more than a decade.

Rising prices in turn, are worrying not only the Federal Reserve, but investors in the global bond markets whose decisions govern home mortgage rates.

Last week, thirty-year fixed rates hit 6.60 percent — up from 6.25 percent the week before. A month ago, you could easily find thirty year money in the mid-five percent range. Not a chance of that this week.

Last week’s were some of the highest rates we’ve seen in nearly nine months — and they’re definitely not helpful in getting the real estate recovery rolling.

So we’re in a bit of a delicate situation: On the one hand, a new University of Michigan poll finds ‘record numbers of consumers now think there are very attractive prices on homes for sale,’ according to survey director Richard Curtin.

Pent up demand is out there. Consumers recognize that prices are down, supply is up, and that for people who need to move or buy a house, the timing looks pretty good.

On the other hand, mortgage costs are changing the affordability equation. At some point, those higher financing expenses start squeezing potential buyers out of the market, despite enticingly low prices.

Maybe that process has already begun: The Mortgage Bankers Association reports that new loan applications to buy houses using conventional loans dropped last week by seven point two percent.

Home purchase applications involving FHA — by far the hottest segment of the market — jumped by just four percent. The week before FHA applications were up by double digits.

The upshot of all this for anyone who’s thinking about buying or selling any time soon: Get off your duff. Rates are moving up, and nobody can guarantee where they’ll stop.

If you see the house you want at the right price, make your offer sooner rather than later, and lock that rate.

Written by Kenneth R. Harney for www.RealtyTimescom. Copyright