Home buyers waiting as rates rise, prices fall

Consumers just can't get a break, and neither can the housing market.

Though still at historic lows, mortgage interest rates have trended higher in recent weeks at a time when consumers are already grappling with rising prices on everything from gasoline to groceries.

In the Twin Cities metro area, for example, the average 30-year fixed-rate mortgage on Wednesday was 6.71 percent with 0.92 points, according to HSH Associates in Butler, N.J. In mid-May, a comparable loan, with 0.8 points, was at 6.51 percent. On a $300,000 mortgage, the monthly difference would be about as much as it takes to fill your gas tank.

"Given the general tone of the economy, people are trying to be much more careful about any additional expense, whether it's gas, a mortgage or home improvements," said Alex Stenback of CTX Mortgage in Plymouth. "We're all in that mind-set and are all on the defensive."

If and how those increases affect the market won't be apparent for several weeks, because of the lag between purchases and closings.

Kevin Knudsen, president of the Minneapolis Area Association of Realtors and branch vice president with Coldwell Banker Burnet Realty in south Minneapolis, said that, although sales have been down as expected during the holiday week, the buyers who are out there seem undeterred by the recent interest rate fluctuations.

Knudsen said activity at open houses has been steady and increasing. Many buyers are coping with changes in rates by signing up for "lock and shop" programs that allow them to secure a rate when they start shopping and lower it if rates dip, he said.

Nonetheless, many borrowers will decide to spend less if they know that they're going to pay a higher rate.

"I do believe that, as people enter the marketplace, they become very sensitive to the small shifts," Knudsen said.

According to data from the Minneapolis Area Association of Realtors, pending sales for the third week in June were down 1.8 percent compared with last year, the ninth week in the past 11 when sales were within 5 percent of a year ago, indicating that the market is stabilizing somewhat.

For the same week, the number of new listings in the Twin Cities metro area fell 10.6 percent compared with last year. That was the 16th consecutive week of declines from the previous-year periods, leaving the market with 2.6 percent fewer listings overall and 5,881 fewer new listings than last year at this time.

Despite the slowdown in listings and sales activity, nationwide mortgage originations have risen in recent weeks, in large part because many borrowers are trying to trade their adjustable-rate mortgages (ARMs) for fixed-rate mortgages.

Application volume for the week ended June 27 rose 3.6 percent on a seasonally adjusted basis, according to the Mortgage Bankers Association. Refinancings rose slightly, from 36.6 percent to 36.8 percent of all originations, while applications for adjustable-rate mortgages decreased from 9.39 percent to 6.33 percent of the total.

ARMs, not long ago the darling of the mortgage market, have now fallen out of favor as borrowers seek the safety of fixed-rate mortgages in a time of economic uncertainty. Perhaps the biggest wild card, Stenback says, is the threat of higher inflation, which tends to cause mortgage rates to rise as well.

It's all tied to wages

Key to the whole scenario is wage growth. It hasn't kept pace with escalating prices, and that could naturally help temper inflationary pressures.

"It's hard for inflation to get out of control unless you have wage inflation, too," Stenback said. "That's a kernel of optimism."

Regardless of what happens, Greg McBride, senior financial analyst for bankrate.com, said that fluctuations in rates tend to cause borrowers who are on the fence to make a commitment. But that's not happening now.

With home prices falling in many communities -- the median home sale price in the Twin Cities metro area fell almost 10 percent in May -- many borrowers are waiting for further price declines to offset the buying power they've lost because of higher mortgage rates.

For example, if you were shopping for a house in early May and could afford payments on a $200,000 loan, McBride said your limit would drop to a $190,000 mortgage if rates went up by half a percentage point.

"So rather than opt for higher payments, a lot of prospective borrowers are waiting for further price declines," McBride said.

His advice to mortgage shoppers?

With the threat of either higher inflation or a federal funds rate increase to corral looming inflation, there's a better chance than not that rates could rise. But by how much and when is anyone's guess.

"Your risk is to the upside," McBride said. "The risk is that rates go up and it kills your deal."

Jim Buchta • 612-673-7376