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Mortgage applications fall for second consecutive week as rates rise

WASHINGTON -- U.S. mortgage applications fell for the second consecutive week as higher borrowing costs made homes less affordable, a private report showed.

The Mortgage Bankers Association's applications index fell 1.1 percent to 713.5 the week ending Sept. 30 from 721.2 the previous week, the group said Wednesday. Applications to purchase homes declined 1.9 percent to 473.8, while filings for loans to refinance mortgages held near their lowest level in four months.

Mortgage rates rose, with the 30-year fixed rate increasing to 5.94 percent from 5.85 percent the prior week. Borrowing costs are being pushed higher by inflationary pressures, which are raising yields on the 10-year Treasury notes that many mortgage rates are pegged against.

"Mortgage rates are going up and I expect them to continue to go up as the year progresses," Anthony Chan, senior economist at JPMorgan Asset Management in Columbus, Ohio, said before the report.

Borrowing costs remain within a percentage point of the all-time low of 4.99 percent for the 30-year fixed rate, which was established in June 2003. Still, higher home prices and the prospect of slower home appreciation gains are damping the housing market, Chan said.

At the current 30-year fixed mortgage rate, borrowing costs for each $100,000 of a loan would be $595.70 a month. That compares with a low of $536.21 in June 2003.

Chan predicted the 30-year fixed rate would reach 6.25 percent before the end of this year.

"I am concerned that in some housing markets, prices have run up very, very rapidly and affordability is down," Harvey Rosenblum, research director for the Federal Reserve Bank of Dallas, said Sept. 27.

The average rate on the 15-year mortgage rose to 5.55 percent from 5.44 percent last week, according to the association. The rate on a one-year adjustable mortgage increased to 5.13 percent, from 5.02 percent, its highest level since March 2002.

The mortgage association's index for loans to refinance mortgages rose 0.1 percent to 2107.4 the week ending Sept. 30, compared with 2106.6 the prior week and 2270.8 a year ago.

The Fed maintained its course on interest rates last month, raising the benchmark federal funds target rate by 25 basis points to 3.75 percent. A basis point is 0.01 percentage point.

Building material costs have increased since Hurricane Katrina hit the Gulf Coast on Aug. 29, according to economists. The average price for a gallon of gasoline at the pump was $2.98 Tuesday, compared with $2.65 before the hurricane.

The yield on the benchmark 10-year Treasury note has risen 20 basis points, closing at 4.369 percent Tuesday, since Katrina made landfall. The note reached a two-month high of 4.385 percent on Oct. 3. Chan expects the yield to reach 4.75 percent by the end of the year.

"Right now, what we're seeing are some inflationary scares from the hurricanes," said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. "That's what's pushing people out of the bond market and pushing up mortgage rates."

Key housing indicators are pointing in opposite directions. Still, economists such as Nariman Behravesh, chief economist of Global Insight, in Lexington, Mass., say the five-year housing boom has topped out.

U.S. new home sales fell 9.9 percent in August, the most since November of last year. Pending sales of previously owned single-family homes, condominiums and co-ops rose 3.2 percent to a record level for the same month, the National Association of Realtors reported Wednesday.

"We're at or close to a peak in housing," said Behravesh. "I have to believe that housing will slow as inflation edges up and the Fed keeps tightening monetary policy and long bond yields increase."

Douglas Duncan, chief economist of the Mortgage Bankers Association, expects mortgage rates to remain low enough to keep housing sales on pace for a fifth consecutive record this year. He estimates home sales will increase to a record 8.22 million this year from 7.99 million in 2004, before slowing to 7.9 million in 2006.

"The housing market's going to soften up a little bit in the fourth quarter, but it's still going to be a record year for sales," said Bob Moulton, president of American Mortgage Group in Manhasset, N.Y.

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