U.S. mortgage rate rise threatens housing recovery

By Al Yoon - Analysis

NEW YORK (Reuters) - A dizzying rise in U.S. mortgage rates this week has left homeowners worried about the government's ability to revive the housing market as a means to economic recovery.

Higher mortgage rates could hinder a nascent rebound in housing this year, where cheaper loans and lower prices have enticed buyers to cut into the inventories of unsold homes.

Loan refinancings to take advantage of lower rates have also been key supports of the housing market in 2009, providing a rare bright spot for a market buffeted by rising defaults, foreclosures, and falling prices.

The level of interest rates is central to President Barack Obama's efforts to break the decline in housing, where prices which have fallen more than 30 percent since the 2006 peak are causing a vicious cycle of foreclosures. Housing is also seen as a driver of a recovery in the U.S. economy which is hanging in a delicate balance between growth and a deeper recession.

"The interest rate rise this week is very troubling for the housing market," said Ronald Temple, co-director of research at Lazard Asset Management in New York. "It raises the cost of purchasing a home at precisely the time when we have large excess supply of homes hitting the market."

The surge in 30-year mortgage rates to as high as 5.5 percent this week from 4.875 percent a week ago doused refinancing activity by homeowners who had been making applications at their fastest pace since 2003, brokers said.

A bond market rally on Friday softened the blow, but the magnitude of the mortgage rate spike this week could mean record low rates near 4.5 percent seen earlier this year will not be seen again.

Many American homeowners may have been caught by surprise, having been told for months that the Fed would keep interest rates low. Some, perhaps with unrealistic expectations that rates would dive to 4.0 percent, are "freaking out" since they feel they missed the opportunity, said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York.