Rising interest rates are starting to dampen the
housing market, mostly by dousing the previously red-hot rush
Mortgage applications dipped 5.4 percent last week, with
most of the drop caused by refinancing, which fell 7 percent,
according to the Mortgage Bankers Association of America. The
refinancing index is down 38 percent from its late-May crest.
"Refinancing will basically shut down," said Timothy
Rogers, chief economist of Briefing.com. "At some point,
rising rates will skunk the market. Maybe starting in the
Real estate has been a critical element in the economy's
struggle since the recession of 2001. Record sales of new and
existing homes have pumped money into construction and other
sectors. Refinancing also has pumped cash into consumers'
Bolstered by housing, the economy has grown since late
2001, but so sluggishly that nearly 3 million jobs have
disappeared. Now, many economists say an improving economy can
overcome any chill from slowing real estate.
"I think GDP will take off like a rocket in 2004," Rogers
Rising rates, in fact, can be taken as a sign that the
recovery is picking up steam, argued economist Campbell Harvey
of Duke University's Fuqua School of Business.
Growth of more than 3 percent will be needed to trim
joblessless, he said.
"The question is, just how strong the recovery is going to
get. I think employment is going to be very slow to come back.
And some of those jobs that were lost are not going to come
Even with the recent slide, refinancing and home-buying
Mortgage applications for home-buying are only 4 percent
under their all-time high and 26 percent higher than a year
ago, according to economist Celia Chen of Economy.com.
And in the short term, rising rates may trigger a run to
get mortgages before they go higher. After that, the market
cools --- especially if the climb continues.
"But it doesn't come to a screeching halt," said Cynthia
Latta, chief U.S. economist for Global Insight. "When it gets
to 6.5 or 7 percent, you will see a lot people hesitate."
Home prices, which have steadily advanced, will likely slow
or take a modest step backward, she said.
The Federal Reserve has slashed short-term rates from 6.50
to 1 percent in an effort to spur spending. But mortgage rates
are typically pegged to long-term Treasury bonds, which the
Fed does not control. However, Fed Chairman Alan Greenspan in
the spring managed to push bond rates down by signaling a
commitment to keep shoving money into the economy. When the
Fed shifted to a rosier view, bonds sold off, nudging rates
Only a return to recession would likely send rates back to
the lows of the spring, say economists. More likely is a
continued slow climb.