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Mortgage Rate Rise Spurs Some to Buy Now

The recent rise in mortgage rates might seem like yet another reasonto stay out of real estate. But for some home buyers, it's having just the opposite effect.

AP

With a clear upward trend in mortgage rates, more people are moving off the sidelines to lock in now before rates rise even higher.

By itself, the increase isn't enough to pull the housing market out of a severe slump. In fact, some analysts think a continued rise in rates—largely due to the Federal Reserve's new emphasis on fighting inflation—will end up hurting the real estate market.

But for now, climbing mortgage rates are giving homebuyers an incentive to jump in.

Ken Baris, president of Jordan Baris Realtors in West Orange, N.J., says he put a deal together this week for a client selling to someone who decided to buy now instead of waiting for the sales price to drop, as they have been doing nationally. The buyer wanted to lock in the lower rate.

"As a salesperson, the little pop in rates has actually been good news because we've been looking for a trigger to create some urgency for buyers," Baris says. "There's been so many buyers who have been waiting on the sidelines figuring values will keep dropping.

"Now that the rates are actually increasing," he adds, "the buyers are starting to do some math and figuring that higher rates over 30 years may be much more expensive than waiting for the value of a property to drop $50,000. As a result we are seeing an increase in activity."

Home sales are still lagging, with April results down 17.5 percent from a year ago. And for now, the sense of urgency on mortgage rates seems to be limited to those who are actively seeking to buy a home, and is not drawing those who wouldn't normally be in the market.

"Consumer psychology is keeping buyers from buying today," Ara Hovnanian, CEO of homebuilder Hovnanian Enterprises, said on CNBC Thursday. "Clearly mortgage rates are not the issue...Psychology is the biggest issue today."

Other factors--such as the rising cost of food and energy--are involved in homebuying, which complicates the picture even more.

"People know they need to do something," says Arnold Martin, president of Absolute Lending and Mortgage in Fayetteville, Ga. "In many cases they are frozen right now and not knowing what to do because they're so overwhelmed with their other expenses."

Martin says energy costs are of particular concern to consumers. That cost-consciousness is making some buyers more eager to lock in a mortgage rate once they actually agree to purchase a home.

"Most want to lock in almost immediately after they start their loan applications," he says. Rising rates are "truly having an effect because now people are factoring in what their interest rates are and also their automobiles and gas."

Even among those who think higher rates aren't pushing new buyers into the market, there is little sentiment that they're discouraging anybody--at least for now.

"Anytime you can get a 30-year fixed for less than 7 percent you're doing pretty well by historical standards," says Holden Lewis, of Bankrate.com, which tracks mortgage rates. "If only home prices would bottom out, when there is an unmistakable sign that they have bottomed out and we're headed back up, that's where you would see the fence-sitters jumping off."

Lewis says more stringent lending policies, including higher down payments and documentation of income, are having a far greater impact on housing troubles than mortgage rate increases.

"With the qualifications being a little bit stronger, that seems to be what has slowed us down more than the rates themselves," says Eric McLendon, of the Corcoran Group in New York City.

Sales professionals like Baris hope the higher rates might offset some of the other obstacles and drive people into the market.

"There's a lot of guesswork and luck that's going to be involved, but it's pretty commonly believed that rates will be going higher and it's already started. How much lower values will go is the big question," he says. "Call it the tipping point--where higher rates will nullify the benefit of lower prices for most purchases. It's creating some people to jump into action."

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.