Mortgage rates edge higher, affordability drops

The week's economic data didn't surprise investors, so there was little change in bond yields and long-term interest rates.

The benchmark 30-year fixed-rate mortgage rose 3 basis points to 6.39 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 5.72 percent; four weeks ago, it was 6.42 percent.

The 15-year fixed-rate mortgage rose 3 basis points, to 5.95 percent. The 5/1 adjustable-rate mortgage rose 8 basis points to 5.89 percent.

The biggest economic report of the week was about November employment. According to the Labor Department, the economy grew by 215,000 net jobs last month, almost exactly as investors and economists expected. The report had a negligible effect on rates.

Now investors are waiting for the next toe to tap: next week's meeting of the Federal Reserve rate-setting committee. Everyone assumes that the Fed will raise short-term rates by a quarter-point, and that increase already has been established in the full spectrum of interest rates. Investors are going to pay close attention to the Fed's explanation of its action. Will the central bank hint that the rate-hike cycle is about to end? Will it say that it's worried about a resurgence of inflation? Mortgage rates could go up or down, depending on how investors react to what the Fed says.

Specifically, the direction of mortgage rates depends on whether bond traders agree with the Fed. If the Fed suggests that inflation isn't a threat for the foreseeable future, bond traders will conclude that the rate-setting committee is a bunch of softies who might let inflation out of its cage and mortgage rates would rise sharply. That scenario is unlikely.

It's also unlikely that the Fed would say that it's worried about a spike in inflation and hint that it will keep raising rates into spring. If that were to happen, it's hard to predict what would happen to rates. They might drop because of fear that the Fed would send the economy into recession. On the other hand, bond traders might wonder what the Fed knows that investors don't yet know, causing rates to rise on the prospect of higher inflation.

The most likely possibility is that the Fed will continue to say that it's keeping a close eye on the economy and will react as warranted. In that case, the bond market won't worry about the Fed and will pay attention to other economic indicators.

For a lot of home shoppers, the prospect of rising mortgage rates is less worrisome than the reality of skyrocketing house prices, which are going up 10 times faster than wages. People who want to buy their first house find themselves hoping that a housing bubble bursts.

According to the Labor Department, wages and benefits rose just 1.2 percent from the third quarter of 2004 to the third quarter this year, when adjusted for inflation. During the same period, home values rose 12.02 percent, according to the Office of Federal Housing Enterprise Oversight, which governs mortgage financing giants Fannie Mae and Freddie Mac.

If those numbers don't change, it will take more than 58 years for wages and benefits to double, but just a little over six years for home prices to double. Or, to put it another way, by the time wages double in 58 years, today's $200,000 house would cost $144.6 million if values kept rising 12 percent a year.

Relying on another set of economic data, the National Association of Realtors compiles a housing affordability index.

According to the Realtors, typical family makes enough money to buy the typical used home, as long as the family can make a 20-percent down payment. But affordability is slipping.

The Realtors report that, in the third quarter, the typical family had 117.8 percent of the income necessary to pay for the typical used house. That figure -- 117.8 percent -- is the affordability index.

By the Realtors' measure, affordability has fallen noticeably, from 138.4 percent in 2003, to 132.6 percent last year, to this year's third-quarter figure.

The situation is worse for the mythical first-timer who is buying a lower-priced starter home and making a 10 percent down payment. The typical first-time buyer has only 68.4 percent of the income necessary to buy, according to the Realtors.