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Interest rates make biggest increase since 1998

By Scott Harrison
Published On: Sep 06 2013 10:41:36 PM CDT
New home sales

John R. Coughlin/CNNMoney.com

COLORADO SPRINGS, Colo. -

Local experts said the days of record-low interest rates likely are gone for good, but the reasons why rates have risen may surprise you.

The interest rate has increased from 3.25 percent in May, to around 4.5 percent now.  Reflective of the change is a decrease in home sales after record-breaking increases in May, June and July.

Jay Garvens, a mortgage lender in Colorado Springs, said rising interest rates usually indicate a strengthening economy -- but that's not the case currently.

"We're seeing some strong indicators, but not enough to show the economy is significantly improving," he said.  "Spending and demand for durable goods are still down."

Garvens said rising rates are fueled mostly by speculation about changes in U.S. fiscal policy.  The federal government is deciding whether to continue to print money to subsidize financial markets, he said, and there will be a leadership change on the Federal Reserve Board.

Garvens also said the summer home sales boom is typical of the season, when people spend more before their kids return to school. 

"What we're seeing is an extremely fragile economy that's run primarily on the government printing money," he said.  "They're trying to create momentum and demand for home-buying."

The recent rise in interest rates represents a significant loss of savings for potential home-buyers, said Fred Crowley, an economist at the University of Colorado-Colorado Springs.

"For someone buying a house right now, that increase means about $100 more in a monthly mortgage payment," he said. 

Garvens goes further, saying that some mortgage lenders are laying off staff because fewer homeowners are refinancing.

"They can't save as much money," he said.  "It's not worth their time and effort."

Still, Crowley sees hope for the economy albeit in slow progress.

"Everything is getting better," he said.  "For the person struggling, it isn't there yet."

Crowley and Garvens agree that interest rates, though increasing, remain lower than historically average rates of between 6 and 8 percent.  They also agree that a 6 percent rate strikes the best balance between benefit to home-buyers and economic growth.

"The only way I can see them going lower again is a major geopolitical event like (the situation in) Syria, or a 9-11 (Sept. 11, 2001, terrorist attacks)," said Garvens.  "That would really shut down the economy, which nobody wants."

Finally, Garvens said a true indicator of a strong economy is when commercial real estate is selling nearly as well as homes are.

"But we're still a ways off from that," he said.

The interest rates mentioned in this story are for 30-year, fixed-rate mortgages.

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