Mortgage rates have spiked over the past few weeks, rising at the fastest pace since 2010, sparking fears that the housing market could weaken and undermine the country’s economic recovery.
In the short term, the jump in interest rates is spurring home buyers in the Washington region and other hot markets to action, adding to the already frenzied competition to get a home. But a sustained rise would hurt a fragile housing recovery, which has climbed out of the depths of its crash with the help of record-low rates, economists said.
Rates are now hovering near 4 percent, still historically low but nearly two-thirds of a percentage point higher than last month. They have been driven up by anticipation that the Federal Reserve could soon begin scaling back its generous bond-buying program. The mortgage market is closely watching the central bank’s meeting Wednesday that could determine whether rates shoot even higher.
“The biggest threat to the recovery is that rates rise too fast,” said Mark Zandi, chief economist at Moody’s Analytics.
Already there are signs that higher rates are becoming a drag on the housing market. Refinancing applications fell 11 percent over the past two weeks, according to the Mortgage Bankers Association. They are down 36 percent from the beginning of May.
The number of people who applied for mortgages jumped 5 percent last week, following several weeks of decline, as buyers such as Katrina Lawson clamored to lock in rates.
Lawson and her husband began searching for a home in Northern Virginia’s Ashburn neighborhood in March and found that listings in their budget were often snapped up within a few days.
“There isn’t time to go home and ponder,” said Lawson, 32. “If you like something, you have to act fast.”
When mortgage rates began to rise, the first-time home buyers realized they were running out of time. They were pre-approved for a mortgage with a 3.69 percent rate in April, but when they found a home in May, the best deal they could find was 3.87 percent.
“We’re kind of bummed that we missed that window,” Lawson said. “I know it’s the lowest rate in years, but we definitely wanted to jump on the opportunity.”
For now at least, the data still point to a solid housing recovery. Housing starts rose 6.8 percent in May, according to government data released Tuesday. That was slower than expected but still a good pace, analysts said. Home builder confidence, meanwhile, has reached a seven-year high, according to another report this week. Home prices have also risen at double-digit rates for a year, and the rate of foreclosures has begun to fall.
There is still plenty of work to be done, but the housing market is “light-years away from a few years ago,” Zandi said. “We’re well on our way, and housing is on the verge of a good, long run.”