Rates rise yet again

The mortgage market stopped making sense again.

For months, long-term mortgage rates fell even as the Federal Reserve was raising short-term interest rates. The Fed's chairman called the decline in long-term rates a "conundrum."

Then, at the end of June, the Fed raised short-term rates for the ninth time in a row, and mortgage rates rose, too. They went up about one-third of a percentage point from late June to early August. It looked like the conundrum had been left in the dust.

This week, on Tuesday, the Fed boosted short-term rates yet again, for the 10th time in a row -- and long-term mortgage rates fell a bit, taking back part of an abrupt gain from late last week. As a result, Bankrate.com's weekly mortgage rate survey shows an increase compared to the previous week, but the rise would have been bigger if the survey had been conducted before Tuesday's Fed meeting, instead of after.

The benchmark 30-year fixed-rate mortgage rose 5 basis points to 5.96 percent, according to the Bankrate.com national survey of large lenders. It was the sixth week in a row in which mortgage rates went up. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.38 discount and origination points. One year ago, the mortgage index was 5.91 percent.

The 15-year fixed-rate mortgage rose 5 basis points to 5.56 percent. The 5/1 hybrid adjustable-rate mortgage rose 11 basis points to 5.62 percent.

This week's rise in rates can be attributed to Friday's release of the July employment report, in which the Labor Department announced that a net 207,000 jobs were created. Economists had been expecting a number closer to 180,000. The average hourly wage went up about 6 cents, to $16.13. That increase was more than economists had expected, too.

Job growth and pay raises invite inflation, just as surely as tulips herald warmer days. When investors catch sight of inflation in the distance, long-term interest rates go up. That's what happened Friday, when the employment report came out. The yield on the 10-year Treasury note jumped eight basis points that day; on Monday, it went up two more basis points. Mortgage rates went up.

On Tuesday, the Fed raised short-term rates, acknowledging that inflationary pressures exist and assuring investors that the central bank is doing its best to keep inflation low. That apparently assuaged investors' worries, as the yield on the 10-year Treasury dropped a basis point Tuesday and another 2 basis points Wednesday morning. Mortgage rates dropped.

Clearly, the unexpectedly strong employment report had a bigger impact on long-term rates than the widely expected Fed rate increase.

If the job market continues to strengthen, expect mortgage rates to keep rising, says Jeff Lyons, general manager of RealEstate.com. He expects home sales to continue at a strong clip, and for the Fed to keep raising short-term rates. "What the long rates do if that plays out, they're probably going to continue to inch up," he says.

Will higher mortgage rates translate into a collapse in home values in overheated markets? Lyons thinks it's more likely that home prices would level off until potential buyers' incomes catch up.

"I'm hoping we'll have this continual glide path of rates going up and everything comes into equilibrium nice and easy," Lyons says.