SALT LAKE CITY — After months of historically low mortgage interest rates, the amount buyers are charged to borrow money for a home loan is increasing.
Last week, interest rates for a 30-year, fixed-rate loan rose to about 4.75 percent — up more than a full percentage point from mid-May.
While some might see the spike as a harbinger of negative trends to come, other observers attribute the increase to the improving national economy.
“Any negative impact from the rise in interest rates is probably more than offset by stronger job growth, stronger income growth and more construction activity,” said Mark Vitner, managing director and senior economist for Wells Fargo.
Vitner noted that mortgage rates are still “awfully low.”
The rise in interest rates is not going to “rob the economy of its growth,” he added, but it should prevent the speculative activity that helped create the housing bubble that led to the Great Recession.
“The rise in interest rates is not as troublesome for the economy today as rate hikes were in the past because we’re starting at (a lower point of reference),” Vitner explained. “Inflation is still very low. And the economy is gaining momentum.”
A local analyst said the hike was also prompted by changes in monetary policy by the Federal Reserve.
Over the past few years, interest rates have been driven largely by the Fed’s policy of quantitative easing — purchasing long-term government bonds with the intent of lowering interest rates for consumers and businesses, explained Trent Kaufman, principal at the Cicero Group, a Salt Lake City-based market research firm.
Recently, the Federal Reserve announced it would likely begin tapering spending on quantitative easing toward the end of the year and could end the process all together by 2014.
The announcement prompted investors to sell out of the bond market, which pushed bond prices down, Kaufman said.
“This increased bond yields," he said. "A bond’s yield, or total return, is inversely related to its price. Since interest rates for consumers and businesses are generally tied to bond yields, as yields increased, interest rates increased as well.”
Kaufman noted that in the near term, interest rates are likely due for a slight correction.
“Given that interest rates are still well below historic levels, they will likely continue to increase over time, especially as the economy experiences the effects of the slowing of quantitative easing,” he said.
Kaufman warned consumers to keep close tabs on the national unemployment rate, which the Fed uses as the primary gauge to determine when and how much to taper quantitative easing. The stated threshold for beginning to taper its spending is a 7 percent nationwide jobless rate, he said, and its threshold for ending spending altogether is at 6.5 percent.
Currently, the U.S. unemployment rate is at 7.6 percent, while the Utah jobless rate stands at 4.6 percent.
Regarding the impact that rising mortgage interest rates would have on the local housing market, Kaufman said that while a jump in rates could slow the housing recovery — in general, a 1 percent increase “makes monthly payments 10 percent more expensive for buyers” — interest rates are still near historic lows.
“The threshold at which the housing recovery would stall is unclear, but most analysts who closely follow the housing market believe we are still well below critical levels,” he said. “Given that Utah’s housing market has performed even more strongly than the national market, we are in great shape to maintain our positive momentum.”
Moreover, the fact that the Federal Reserve finally feels ready to transition the U.S. economy to greater independence and end quantitative easing should be regarded as a signal that the economy, especially the housing market, is ready to stand sustainably on its own and will continue its recovery, he added.
Meanwhile, Michele Weaver, vice president and manager of the Homeowners Café, a free educational resource center in Midvale, said the rising rates might prompt increased activity from prospective buyers who want to take advantage of the still relatively low rates.
“You could see a surge of people wanting to buy quickly before the rates rise further,” Weaver said.