Spike in mortgage rates slows refinancing in Silicon Valley

Just as signs of recovery in the local housing market have begun to emerge, a spike in mortgage rates is slowing refinancings for many valley homeowners and complicating purchases for some buyers.

But experts say homes in the low and middle price range are still selling more briskly than they have in months.

Mortgage rates have been rising rapidly since Memorial Day because of fears about inflation.

Freddie Mac, the government-backed mortgage financing company, said Thursday that rates rose 0.3 percentage points this week, to an average of 5.59 percent for 30-year, fixed-rate loans of less than $730,000 in the Bay Area, because of investors' worries that government borrowing will increase inflation.

Three weeks ago, the national average rate for such loans was just 4.82 percent.

"What the rate hike did was it put a lot of loans on hold, and I mean a lot of loans," said Doug Jones, a broker with Mortgage Magic in San Jose, echoing others in his field who said refinance loans have slowed.

Borrowers who were poised to refinance their mortgages and lower their monthly payments with a rate of 5 percent, for example, might not realize any savings at 5.75 percent. Thus, many owners who had not locked in a super-low rate have put their refinance plans on hold.

As for buyers, Realtor John Dozier, owner of Cupertino Properties, says one client is rushing to close a home purchase before his "rate lock" expires, and another

 is ratcheting down his offer on a house because the jump in rates means he can't afford to pay as much.

This week's national average rate, the highest since November, would add about $90 to the monthly payment on a $500,000 mortgage compared with last week's average rate.

The increase is tied to a rise in Treasury bill yields that some observers worry could delay an economic recovery by increasing the cost of all kinds of credit.

Meanwhile, the Mortgage Bankers Association said Wednesday that the refinance share of mortgage activity dropped to 59.4 percent of all mortgage applications, its lowest share since November.

Hard on buyers

In the valley, the rate hike is especially hard on buyers who were stretching their budgets to afford to buy homes, real estate professionals said.

Those buyers need to "either put more cash down, which they don't have, or ask the seller for assistance in closing costs, or third, they are having to go back and renegotiate the purchase price," said Judy Jarvis Ellis of Alain Pinel Realtors in Palo Alto.

Sue Baker, a mortgage broker with Princeton Capital in Cupertino, said the rise in rates reduced one client's purchasing power

(Source: Freddie Mac)

from $450,000 to $400,000.

As for refinancing, "anybody that hasn't locked a refinance right now probably won't close," Baker said.

Real estate agents say there are still many qualified buyers looking for homes for less than $500,000, so sales of such properties are brisk. The low end of the market is "blazing hot," said Nina Yamaguchi, who manages a Coldwell Banker office in Cupertino.

For example, "a clean little house in Blossom Valley" listed for $448,000 recently had 12 offers, and all but one bidder offered to put 20 percent down, she said.

As for mortgage rates, Yamaguchi said, "We're only 1 point up off of a historic low. It isn't as though the world has ended."

Market 'on fire'

Jeff Barnett of Alain Pinel Realtors said the market is "on fire" for homes in the midrange, near $800,000.

"We just had the best nine days in a row that we've had since last summer," he said. "We did 40 deals in the first nine days of June, with an average purchase price of about $750,000."

The slowdown in refinancings also means buyers' loans are going through faster, he said. "To me, it's a nice benefit."

And there may be some rate relief ahead. Treasury yields were lower Thursday, which typically means rates for Fannie Mae- and Freddie Mac-backed loans will move lower, too.

Narbik Karamian, a Los Gatos mortgage broker, said the federal government has been pushing rates down for months by buying billions of dollars worth of mortgage-backed securities and Treasury bonds. Now that those purchases have slowed, rates are reacting to normal market forces like inflation worries.

But, he said, he thinks the government would renew its buying spree if rates got high enough to actually stall the housing market.

"They'll have no choice but to come back and start buying Treasury bonds to bring rates back down," he said. The housing market is "like a patient starting to recover. They can't just let it go on its own, they need to monitor it to see how it goes."