Mortgage rates rise, near a 4-year high
By Holden Lewis • Bankrate.com

Mixed news on inflation drove the 30-year, fixed-rate mortgage to its highest rate in almost four years. Short-term adjustable-rate loans got a bit of relief.

The benchmark 30-year fixed-rate mortgage rose 6 basis points to 6.73 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 0.34 discount and origination points. One year ago, the mortgage index was 5.78 percent; four weeks ago, it was 6.57 percent.

The 15-year fixed-rate mortgage rose 3 basis points to 6.33 percent. The 5/1 adjustable-rate mortgage fell 2 basis points to 6.33 percent.

The last time the 30-year fixed-rate mortgage had a higher rate was June 12, 2002, when it was 6.74 percent. The week after that, it fell to 6.6 percent and remained below that mark for 200 weeks. It looks like those days are gone.

Inflation fears drive up long-term rates
Fears of accelerating inflation drove up long-term mortgage rates this week. On Tuesday the Labor Department released the producer price index, which measures wholesale inflation, and on Wednesday the department released the Consumer Price Index, which measures retail inflation. These reports packed a lot of information, but the bond and mortgage markets focused most of their attention on core retail prices -- that is, prices for all goods and services except food and energy. The numbers aren't reassuring.

Core retail prices in April rose 0.3 percent, a bit higher than expected. In the 12 months ending in April, core consumer prices rose 2.3 percent. A number over 2 percent sets the bond market's adrenaline surging.

For mortgage shoppers, the bad news didn't stop there. While core consumer prices for the last 12 months went up 2.3 percent, they rose at a 3.2-percent annual rate from February through April. That's a sign that inflation is speeding up rather than slowing down. The Federal Reserve has been raising short-term interest rates for almost two years in an effort to keep inflation contained.

Fluke or trend?
That sounds kind of bad, but Michael Carliner, chief economist for the National Association of Home Builders, isn't freaking out yet.

"I wouldn't base it on one month," says Carliner, who is a strong advocate for the position that a single event doesn't make a trend. "If we continue to see prices rise, I think this is outside the Fed's comfort zone. If this is not a single-month spike -- a fluke -- then I think they're going to keep raising rates, and that also the long-term market is going to be influenced by it as well."

That's a lot of ifs. Carliner isn't convinced that inflation will continue to gather strength. It takes months for the Fed's rate increases to completely register, and that means the last few Fed rate hikes haven't been fully felt yet.

Home sales have been cooling lately, and Carliner expects that slowdown to continue because of this year's rise in short-term rates. Bankrate.com's benchmark 30-year fixed has risen about half a point since the beginning of the year.

The drop-off in sales will be more evident among high-end buyers than first-time buyers, Carliner says. He draws a picture of a hypothetical homeowner who refinanced a mortgage last year at 5.5 percent. In such a case, "where you might have otherwise considered trading up, you're going to stay put."

First-time buyers, on the other hand, might just set their sights a bit lower. Mindful of their monthly payments, they'll react to higher mortgage rates by buying less-expensive houses than they originally planned to buy.