Will Mortgage Rates Top 8%?

American homeowners say mortgage rates have the potential to rise above 8 percent in the next year, but are not worried that higher rates and a slowing housing market will hurt the value of their homes.

ING Direct's fourth annual homeowners survey, released Friday, said people who have owned homes for at least three years expect new mortgage rates to rise 1.6 percentage points over the next 12 months.

But 74 percent of those surveyed say they do not worry much about a possible housing slowdown in the next year, with little difference among geographic regions or income levels.

And almost two-thirds say a decline in the value of their homes would have no impact on their day-to-day spending.

The findings suggest that homeowners are pessimistic about rising rates, but do not plan to do much about it, even in areas where home prices are rising rapidly.

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That contrasts with expectations of many economists that mortgage rates might change little, or perhaps fall, especially if economic growth slows.

This might help offset downward pressure on prices if torrid markets such as Arizona and Florida cool off, with inventories of unsold homes at record levels, analysts say.

"I think we're at one of those inflection points in the economy that many households may not yet be feeling," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc.

The ING survey, conducted in April and May by Aegis Group Plc's Synovate unit, studied 1,000 homeowners, who on average earn $65,900 a year and have owned homes for 25 years.

Fifty percent had fixed-rate mortgages, and 14 percent had adjustable-rate mortgages (ARMs) or other kinds of home loans. More than two-thirds of borrowers obtained their mortgages in the last six years, often to benefit from low rates.

Among those surveyed, 71 percent expect mortgage rates to rise in the next year, 21 percent expect little change, and 3 percent expect a decline. Five percent said they didn't know.

The average rate on 30-year fixed mortgages was 6.67 percent in the week ending Thursday, up from 5.62 percent a year earlier, mortgage financier Freddie Mac said.

Meanwhile, the average rate on one-year ARMs was 5.68 percent, up from 4.26 percent. ARMs have recently accounted for about 30 percent of mortgage applications.

SLOWER RATE OF INCREASE?

Rates have risen as the Federal Reserve has increased its benchmark short-term lending rate. Sixteen straight increases since June 2004 has pushed the key rate up to 5 percent.

But many economists expect only one or two more increases, perhaps allowing the economy to grow at a slower but reasonable pace without triggering excessive inflation.

"If the consensus is right and the economy slows, the benchmark 10-year Treasury yield may actually fall over the next year," said John Lonski, chief economist at Moody's Investors Service.

"This means at worst the 30-year mortgage yield will be unchanged from current levels," he added.

Homeowners with fixed-rate mortgages may have less reason to worry about rising rates, especially if, like most of those in the ING survey, they don't plan to move soon.

For those who do, they can take solace that home prices are still rising, though slower than before. The 2.03 percent first-quarter increase was the lowest in two years, according to the Office of Federal Housing Enterprise Oversight.

Those surveyed say they expect their homes to rise 3.8 percent in value in the next year, ranging from 2.5 percent in New England to 4.7 percent in south Atlantic states.

"Most Americans don't live in the 'hot' real estate markets, so their homes are less likely to experience a big pullback in price," Thayer said.

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