Survey: 30-year mortgage rate nears 7 percent
By Holden Lewis • Bankrate.com

Money costs a lot more today than it did just three months ago. The average rate on a 30-year, fixed-rate mortgage is flirting with 7 percent and is almost half of a percentage point higher than it was at the end of March.

The 15-year fixed-rate mortgage rose 12 basis points to 6.57 percent. The 5/1 adjustable-rate mortgage rose 10 basis points to 6.59 percent.

Weekly national mortgage survey

Results of Bankrate.com's June 28, 2006, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Rates march steadily higher
In Bankrate's March 29 survey, the average rate on a 30-year fixed was 6.44 percent. It has risen 49 basis points since -- a gnat's eyelash under half a percentage point. The benchmark rate has risen in 11 of the past 14 weeks. Rates normally seesaw more than that, but not at a time like this, when rates are most assuredly on an upward trend. As the Federal Reserve keeps raising short-term rates, long-term rates have been following.

A lot of bankers and economists blame rising interest rates on a slowdown in home sales. "We're already seeing that," says Ray Champion, president of Pro Mortgage Corp., a brokerage in Dallas. But, he adds, the deceleration in home purchases "is not as fast as I thought it would be."

The National Association of Realtors says home sales fell 6.6 percent in May compared to May 2005. Some 3.6 million homes were on the market, unsold, in May. A year earlier, the housing inventory was 41 percent less, with 2.56 million homes on the market.

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Home prices still rise, too
With slower sales, rising inventory and higher interest rates, you might expect prices to stabilize or even to fall. But that hasn't happened. Nationwide, half of the homes sold in May cost more than $230,000, according to the Realtors. That's 6 percent more than the median price of $217,000 in May 2005. Home prices aren't rising as fast as they once were, but they're still outpacing the overall inflation rate in much of the country. The Midwest is an exception; according to the Realtors, the median home in that region gained only 1.2 percent in value on one year.

Rapidly rising rates could end up forcing home buyers to scale down their expectations. Take the example of someone who can afford to pay about $1,250 a month for principal and interest.

At the end of March, when the average rate on a 30-year fixed was 6.44 percent, a $200,000 loan cost $1,256 a month with principal and interest. Now, with the average rate 6.93 percent, that buyer would have to borrow $190,000 to keep the monthly principal and interest at $1,255 a month. A $200,000 loan would cost $1,321 a month.

Easy money for fussy buyers
Champion says builders in the Dallas area are desperate to unload their newly built, empty houses, so they're encouraging buyers to use the builders' in-house lending arms. "They do whatever it takes to qualify the person and, as a result, you have people in houses with one-year, two-year, three-year, five-year balloon (loans) and stuff," he says. "They've basically put people in houses who probably shouldn't have been in houses."

Home builders are just giving people what they want, though. According to a survey commissioned by Wells Fargo Home Mortgage, first-time home buyers are reluctant to compromise on certain amenities. About 40 percent of the renters surveyed said they were unwilling to buy a house that was smaller than they'd like. A similar percentage of renters said they would avoid buying fixer-uppers. And 70 percent of renters said they wouldn't buy in a neighborhood that's less desirable than their ideal.