JUNE 2004

Rising Mortgage Rates

There is a cloud over the future of housing starts: rising mortgage interest rates. The chart below, prepared by HSH Associates, captures these trends. In his column in the New York Times, Johnathan Fuerbringer examined the outlook for residential mortgage loans. Using the procedures of the Mortgage Banker Association, he estimated the impact of a 30-year fixed rate mortgage rate "of 6.7 percent in next year's second quarter." As a result of these changes, the MBA predicted "sales of existing homes and new homes, as well as housing starts, will fall modestly by the second quarter of 2005."

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As interest rates on fixed-rate mortgage loans rise, consumers seek to cushion the shock by using adjustable-rate mortgage loans (ARMs). In her article in the Wall Street Journal, Ruth Simon reports that applications for ARMs have reached their highest level in "nearly a decade." Recently, they comprised more than 35 percent of mortgage applications. Industry experts believe that ARMs could climb above 40 percent of the market. For example, Washington Mutual Inc. reports that ARMs accounted for 53 percent of loan applications during the first quarter of this year, up from 27 percent a year earlier.