How NOT to Stimulate Borrowing: Increase Interest Rates

Tight Rope

Washington Post today reports a spike in interest rates has blunted a recent refinancing boom. One of the most persuasive purposes supporting big bank bailouts amid a foreclosure crisis  is the need for banks to make cheap money available for property loans.  To help reverse the traumatic trend of home and business property foreclosures, refinancing is critical.  Refinancing comprises the brunt of the mortgage market.

Recent government measures aimed making such funds available at more attractive rates were apparently working.  Since last October, mortgage interest rates held at historic lows until last week, when they rose to 5.25 percent on a 30-year fixed-rate loan, resulting in a mortgage lending drop of over 16 percent.  Guy Cecala, publisher of  Inside Mortgage Finance noted,  “If you were looking to refinance for under 5 percent, this puts the brakes on that.”

Others  suggest that potential buyers be patient–take a longer view.  Michael D. Larson, a housing analyst with Weiss Research, said, “This is going to be a head wind for the housing market…It just shows that we shouldn’t expect some [quick] recovery in housing.”

At 5.25 percent this week, the average on a 30-year fixed-rate loan rose last week from 4.81 percent.  This is the largest increase reported since October of last year last week and the highest rate to date in 2009.

Most remain optimistic. Buyers serious about refinancing at 4.8 percent are unlikely to pack it in just because the rate rests at 5 and a quarter.  They may, however choose to ride it out hoping that the trend is short-lived, according to Brian Bonnet, president of Signature Mortgage.  “While a slight increase in rates disappoints home purchasers,” said Bonnet, “it does not dissuade them from continuing to look”.

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