Will the mortgage rate rise hit loan demand?

A survey released by Freddie Mac says interest rates on 30-year fixed-rate mortgage averaged 5.22% for the week ending August 13, up from the previous week’s 5.22%. The rise in the mortgage rate reflected the rise in yields on Treasury securities. Mortgage rates have stayed at over 5% for 11 straight weeks now. Analysts say that rates have a positive impact on loan demand when they remain below 5%.

Earlier this year, when the rates dropped below 5%, refinancing activity rose. David Adamo, CEO of Luxury Mortgage, says currently homeowner confidence and not interest rate is the major factor impacting the housing industry. “Once the general psychology of the market place returns to normal we will see the purchase activity substantially improve which will restore our housing market and overall economy,” said Adamo. Housing market has been showing signs of stabilization with sales rising and prices declining in many regions of the country. A further rise in mortgage rate could negatively impact the industry. The Federal Reserve (Fed) has proposed to buy as much of $1.75 trillion worth securities in 2009 in order to keep borrowing costs low for homeowners. It looks as though the Fed is meeting resistance from the bond markets.