CENTRAL VALLEY — The days of ultra-cheap U.S. mortgages may be ending, but economists say that's unlikely to slow the housing market and indeed reflects growing confidence that the recovery is real.
Last week, the national average rate for a 30-year fixed mortgage jumped to 3.81 percent, mortgage giant Freddie Mac said in a news release. That's the highest it has been in a year, and almost half a percentage point higher than the average of 3.35 percent at the beginning of May.
The uptick needs to be kept in perspective, Freddie Mac cautioned. Loan rates still are historically low, making homes more affordable and boosting sales and construction.
In Stanislaus County, for example, the rate bump will cost the typical home buyer about $46 more per month, calculated Oakdale mortgage broker John Nelson.
While it sounds bad to have interest rates jump by half a percentage point in one week, Nelson said mortgage rates remain well less than normal.
A median-priced $162,000 Stanislaus home with a Federal Housing Administration-backed mortgage last week would have cost a home buyer about $1,141 per month. With the new rate, that home would cost about $1,187 per month, including mortgage interest, loan principal, tax and insurance payments.
The difference is only "about the cost of going out for a pizza dinner with the family," said Nelson, who manages the Oakdale branch of Mega-Star Financial Corp.
Nelson expects interest rates to continue inching up into the high-4 percent range by the end of the year.
Incremental increases are unlikely to derail the market recovery, which is being fueled by a thin supply of homes for sale and growing demand from buyers, according to real estate industry leaders.
"The housing market has been super red-hot since January," said Sheri Aguilar, president of the Lodi Association of Realtors, which includes more than 800 of Stanislaus' real estate agents. She said there are far more interested buyers than houses for sale in the region.
"It's getting harder to get (purchase) offers accepted," Aguilar said. So to sweeten their offers, "more and more buyers now are willing to pay the difference between a home's appraised value and their offers to buy."
More buyers able to sweeten the deal
That difference between proposed sales price and appraised value used to kill deals because most buyers had little additional cash for down payments. Mortgage standards have tightened since the housing market crash, tying loans more closely to verifiable appraisals and limiting how much can be borrowed.
So if a home doesn't appraise for the proposed sales price, a home buyer must make up the difference or lose the deal to a buyer with more ready cash. More buyers seem able to spend that cash, Aguilar said.
The Northern San Joaquin Valley's improved economy has bolstered consumer confidence and demand for homes, Aguilar explained.
"There are buyers lined up to buy houses," agreed Nelson, who has been in the mortgage business 17 years. "We focus on new loans, and the last two months have been our best in years."
Nelson said loan demand has been so strong that "we're looking to open another office in Modesto by the end of the year."
Stanislaus home prices have been soaring, rising this spring to nearly 23 percent more than what they were a year ago.
During the first three months of 2013, nevertheless, nearly 86 percent of Stanislaus homes were considered affordable for median-income families. By comparison, during the real estate boom's 2005 peak, only 3 percent of homes were affordable.
Rising interest rates would reduce affordability. But Nelson said mortgages have been in the 3 percent range only because government action has held down rates artificially.
After the market crashed and recession set in, the Federal Reserve began aggressively buying mortgage-backed securities and U.S. Treasury bonds as a way to boost housing and lower mortgage rates.
During the recession, skittish private investors also snapped up Treasury bonds, despite meager returns, as one of the safest places in the world to park their money.
Demand for those Treasury bonds drove up prices, which inversely drove down yields, the amount of interest paid to investors who buy the debt instruments.
The end result was lowest-in-history mortgage rates.
Last week's bump in mortgage rates happened after the Federal Reserve Board indicated that it was considering scaling back its stimulus measures sooner than expected based on improving job figures and rising home prices.
Consumer confidence matters most
Real estate agent Linda Bennett, with NeighborWorks HomeOwnership Center in Sacramento, said moderate increases in mortgage costs are unlikely to dissuade most buyers.
"Historically, the interest rate is important, but consumer confidence in the marketplace is more important," Bennett said in an email. "Buyers will still buy homes if they are confident that it is a prudent investment, and if they can still afford to do so."
In this region's real estate market, moderate increases shouldn't have a major effect, according to Jeffrey Michael, who heads the University of the Pacific's business forecasting center. He said supply and demand has been driving the housing sector's recovery, but rising rates eventually could check rising home values.
"The increase in rates has been rapid," Michael said, "and if they continue to rise, mortgage rates are one of the factors that should cause the pace of appreciation to slow down over the next year or two."
Bee staff writer J.N. Sbranti can be reached at firstname.lastname@example.org or (209) 578-2196.
The Sacramento Bee contributed to this report.