Mortgage rates up sharply, but demand, prices slip
By Holden Lewis • Bankrate.com

Even as mortgage rates rise, home buyers have reason for hope. Demand for houses is slipping and median prices are falling. The affordability crisis might be easing.

Meanwhile, mortgage rates are warming. The benchmark 30-year fixed-rate mortgage jumped 11 basis points to an average of 6.28 percent, according to the Bankrate.com national survey of large lenders. It had not been that high since the last week of 2005, when it also was 6.28 percent. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 5.67 percent; four weeks ago, it was 6.27 percent.

The 15-year fixed-rate mortgage rose 12 basis points to 5.87 percent. The 5/1 adjustable-rate mortgage rose 14 basis points to 5.89 percent.

Slight scent of inflation
This week's rise in mortgage rates happened at the same time as the release Jan. 26 of the report on durable goods orders in December. Orders were up 1.3 percent -- higher than most investors and economists had expected. Bond investors interpreted the report to mean that industrial production might be stronger-than-expected this year, carrying the possibility of rising inflation. And higher inflation expectations equaled modestly higher interest rates.

The Federal Reserve's rate hike Tuesday was so widely anticipated that it didn't affect mortgage rates. The bond and mortgage markets already had factored it in.

Rising mortgage rates are bad news for people who are shopping for a house, but falling prices might offset some of the damage. The National Association of Realtors reports that, of existing homes that were resold in December, half sold for more than $211,000. That's down from a $215,000 median home price in November, which was down from a $218,000 median price in October.

Yes, that's a trend
David Berson, chief economist for Fannie Mae, points out that median prices for existing homes fell in four of the last six months of 2005. And resales of existing homes fell in each of the final three months of the year.

"Three consecutive months of sales declines are certainly suggestive of a trend," Berson remarks dryly in his weekly commentary, while noting that "the December annualized sales pace was more than 10 percent below June's peak."

Even with that three-month slide at the end of the year, 2005 marked a record year for home resales, with 7.07 million units sold. Most economists believe there will be a decline in home sales this year, but few, if any, predict a nationwide price decline.

New home prices down, too
As for smaller market for new homes, sales were up 2.9 percent in December compared to the previous month, but the median price of a newly built house fell 2.2 percent, to $221,800. The median price of a new home has fallen three months in a row.

It looks like January and February could be sour months for home sales, too. The Realtors compile a pending home sales index that tracks the number of purchase contracts signed. The index was down 3 percent in December, the Realtors said Wednesday. That implies that a slower pace of home sales in January and February.

The Realtors' chief economist, David Lereah, says home sales lag a couple of months behind movements in mortgage rates. He believes that the slower sales pace at the end of 2005 was a result of rising mortgage rates in the fall. He expects a modest pickup soon.

But he seems to think that the days of rapid price appreciation are over for now. "We're going through a period of adjustment," he says. "As home sellers recognize a return to more normal rates of price growth, some that have been holding out for higher prices will be more willing to negotiate terms that are acceptable to buyers but still provide them a solid return on their investment."

That might not make sellers happy, but could be a boon to buyers.