Home Building Cools A Bit as Mortgage Rates Rise

On Thursday, Freddie Mac reported in its weekly survey that 30-year, fixed-rate mortgages topped 6 percent for the first time since March. The popular home financing rate rose to 6.03 percent, increasing for the fifth consecutive week.

But even as borrowing rates rise, fears aren't surfacing about the bottom falling out of the local housing market. Unlike the late 1980s, when prices plunged, overbuilding has not occurred. And construction is already being constrained by the high cost of land, a lack of suitable sites and tougher zoning regulations.

"We're still posting healthy levels of growth, but we can't sustain the lofty levels of 2003 and 2004," said Donald L. Klepper-Smith, an economist at DataCore Partners in New Haven. He expects the 30-year home loan rate to rise "gently," perhaps to between 6.5 and 7 percent by the end of 2006.

Economists have long forecast that the 30-year home loan rate will rise and remain above 6 percent after hitting historic lows in 2003. So far, that has not happened, allowing buyers to purchase more expensive homes, fueling surges in home prices, in Connecticut and nationally.

Economists said mortgage rates are now rising because financial markets are worried about inflation, particularly in the wake of Hurricane Katrina. The Federal Reserve last month decided to raise a key short-term interest rate, saying it is worried about inflation caused by surging energy prices.

A growing number of manufacturers are being forced to raise the prices they charge their distributors and customers, unable to absorb the higher costs of gasoline, natural gas and oil. That's significant because manufacturers have refrained from raising prices because they face intense global competition. It's also a sign that inflation, an overall increase in prices, is stirring.

Even before the recent concerns about inflation, housing construction in Connecticut was showing some signs of slowing as demand appeared to be topping out.

"I don't think mortgage rates are going to increase so drastically that we are going to see demand collapse," Ugalde said.

Ugalde, president of T&M Building Cos. in Torrington, said buyers have yet to cut back on "extras" such as bonus rooms over garages, or upgrades such as granite kitchen countertops. That would be the first sign that borrowing costs are cutting significantly into the total price and monthly mortgage payment a buyer can afford, Ugalde said.

Concerns, however, are beginning to surface about home price appreciation in Connecticut outstripping gains in income in many parts of the state.

Klepper-Smith said rising home prices have the potential to price an increasing number of people out of the housing market.