By Jim Buchta
Minneapolis Star-Tribune
MINNEAPOLIS — Thursday the Federal Reserve Bank continued what it began two years ago: raising the cost of borrowing. While long-term fixed-rate mortgages including the 15- and 30-year mortgages — the industry standards — aren’t tied directly to the Fed’s rate increases, that’s not the case with short-term mortgages, which typically move in lock-step with the Fed fund rate.
During the past 24 months, for example, the cost of a one-year adjustable rate mortgage has climbed 38 percent, and that is having a trickle down effect across the entire economy but most especially the once-hot real estate market. Thursday the Fed Reserve Bank increased its federal funds rate a quarter percentage point to 5.25 percent and more increases are expected.
“The housing market is the most interest rate sensitive sector of our economy,” said Frank Nothaft, Freddie Mac’s vice president and chief economist. “With rates moving up, that’s leading to a moderate and orderly cooling in the housing sector.”
When the Fed made the first of its 17 rate increases in June of 2004, short-term mortgage interest rates were at record lows and the real estate market was red-hot.
Two years ago, “there were multiple bids and people were offering far above the asking price,” said mortgage lender Clifford Morse, branch manager for American Home Mortgage in Chaska, Minn. “Some were stretching to the edge of what they could afford.”
Borrowers took full advantage of low rates and attractive terms by buying bigger houses, refinancing consumer debt into their mortgages and buying second and third houses, in some cases.
