Mortgage rates rise on good economic news
By Holden Lewis • Bankrate.com

Mortgage rates rebounded this week on a report of stronger-than-expected economic growth.

The benchmark 30-year fixed-rate mortgage rose 10 basis points to 5.82 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 0.35 discount and origination points. One year ago, the mortgage index was 6.07 percent.

The 15-year fixed-rate mortgage rose 8 basis points to 5.24 percent. The one-year adjustable-rate mortgage rose 11 basis points to 4.24 percent.

Economic data have been fairly strong of late, and that has kept a floor under long-term interest rates and bond yields. The most important economic report in the first half of this week concerned gross domestic product, the overall measure of economic growth. The government reported that the economy grew at an annual rate of 3.9 percent from July through September. That was better than the government's initial estimate of 3.7 percent growth in the third quarter.

Consumers continue to spend, too. Consumer spending rose 0.7 percent in October, faster than expected. Adjusted for inflation, spending was up 0.3 percent -- and incomes went up 0.2 percent.

Those economic data, the continuing fall of the dollar in relation to other currencies and the widespread belief that the Federal Reserve will raise short-term interest rates again when it meets Dec. 14, all combined to push mortgage rates higher.

The average rate on a 30-year fixed mortgage had been locked below 5.8 percent since a one-week spike in early October. As recently as June 30, the average 30-year was 6.30 percent.

The 30-year mortgage hasn't averaged 7 percent since April 2002. During the intervening time, home prices have skyrocketed in many parts of the country. Demand for houses in growing regions has outstripped supply, and low rates gave buyers the latitude to bid up the prices. From the third quarter of 2003 to the third quarter this year, the median resale price of a home rose 7.7 percent, according to a report by the National Association of Realtors. Prices grew much faster in hot spots such as Orange County, Calif. (26 percent), Las Vegas (an eye-popping 53 percent), and Washington, D.C. (22 percent). That's ignoring the rest of Southern California and most of Florida.

These rising home values are a boon to the economy because homeowners spend some of their well-gotten gains. A study commissioned by the Realtors concludes that homeowners are quick to convert housing wealth into cash and slower to convert wealth from stocks into cash.

You might expect the opposite to be the case, since it's easier to sell stock than to sell a house or apply for a home equity loan. But a lot of personal stock is locked away in 401(k) accounts. Anyway, 68 percent of households own homes, while 52 percent of households own stocks, either directly or indirectly.

The Realtors' study, "Housing Wealth Effects," was produced by the Harvard Joint Center for Housing Studies and Macroeconomic Advisers. It concludes that when the Fed started cutting rates at the beginning of 2001, it "forestalled economic problems and led to record home sales and home equity borrowing," says David Lereah, chief economist for the Realtors.

The study found that people spend about five-and-a-half cents of every dollar increase in both housing wealth and stock wealth. But they unlock most of the housing wealth in a year, whereas it takes about five years to spend wealth derived from appreciation of stocks.

"In other words, housing produces a quicker lift to the economy while home-price growth provides lasting benefits," Lereah says. "Homeowners are more confident of gains in housing wealth, so they spend more readily and quickly when they occur."