Ron Tarver, KRT Rates on 30-year mortgages have reached their highest point since late July. Details Jump Below: Rates Graphic Talk About It: Post | Chat

WASHINGTON (March 24) - Rising mortgage rates will cool but not crush a national housing market that is still relatively hot, one of the economy's consistently good performers.

That's the feeling among industry experts who have marveled over housing's vibrancy - all the way through the 2001 recession as well as the economy's recovery. Powered by low mortgage rates, sales of both new and previously owned homes clocked record highs four years in a row - from 2001 to 2004.

Sales are expected to slow this year as mortgage rates move higher. For now, economists are predicting the rate climb will be smooth, leaving the housing market in good shape. In fact, current projections call for home sales for all of 2005 to post their second-best year on record.

"I still have a smile on my face," Tom Kunz, president of Century 21 Real Estate Corp., said in an interview. "We still have a pretty hot market."

Sales of previously owned homes - which account for roughly 85 percent of total home sales - dipped by just 0.4 percent in February, but the pace was still considered buoyant. New-home sales soared 9.4 percent, the biggest increase since December 2000, the government said Thursday.

If mortgage rates were to shoot through the roof - which isn't anticipated - then the housing market would be sent skidding, and the economic expansion could be derailed.

There's been a recent pickup in mortgage rates. Rates on 30-year, fixed-rate mortgages this week rose to 6.01 percent - the highest since late July - according to a weekly, nationwide survey of mortgage rates by Freddie Mac, the mortgage giant. Last week, 30-year rates averaged 5.95 percent.

This week's rise was the sixth straight, with investors' fears about inflation pushing long-term rates higher.

Two government reports this week showed inflation gaining momentum. That, along with concerns about rising inflation expressed by Federal Reserve policy-makers earlier this week, fed investors' inflation jitters.

	Increasing Rates

The Fed's inflation comments might have been aimed at putting financial markets on notice that a key short-term interest rate, controlled by the Fed, will keep moving up this year and possibly well into 2006, some economists said.

The Fed lifted that key rate Tuesday to 2.75 percent, its seventh quarter-point boost since its current rate-raising campaign began last June. Investors might have been underestimating where the Fed's key rate was heading, and Fed policy-makers sought to alter that view, some economists said.

Federal Reserve Chairman Alan Greenspan earlier this year had expressed puzzlement over why long-term interest rates, such as mortgage rates, hadn't been rising even as the Fed boosted short-term rates. He called the situation a "conundrum."

Economists in the mortgage banking, residential real-estate and home building industries predict rates on 30-year mortgages will rise to around 6.75 percent by the end of the year. Other economists think it could close in on 7 percent. By historical standards, those rates would still be considered good, analysts said.

"For me, it's the speed at which rates rise that is important. If rates were to go up rapidly and pass 7.5 percent, that would bother me," said Doug Duncan, chief economist at the Mortgage Bankers Association.

Most American homeowners have fixed-rate mortgages so their payments are locked in and wouldn't be affected by run-up in rates, Duncan said.

However, about 14 percent of the roughly 73 million home-owning households have adjustable-rate mortgages, and would be affected. "Those tend to be upper-income households, who are likely to handle that pretty well," Duncan said.

For all of 2005, sales of previously owned homes are expected to total 6.57 million, about 3.2 percent down from 2004's all-time high sales, the National Association of Realtors says.

"The cooling we expect in sales this year means we'll be transitioning from a white-hot housing market into a very strong market," said David Lereah, the association's chief economist. Sales of new homes, meanwhile, are estimated to total 1.15 million this year, down 4 percent from 2004, which was a record high, says the National Association of Home Builders.

If those projections prove true, home sales this year would be the second-best ever behind 2004.

Home prices, meanwhile, continue to rise sharply. That's usually good for the homeowner but can be frustrating for people looking to buy.

The median price of a new home - where half sell for more and half sell for less - rose to a record high of $230,700 in February. The median price of a previously owned home in February was $191,000 - up 11 percent from the same month a year ago.

Greenspan has said he doesn't believe sizable gains in home prices in recent years constitute a national bubble: "A destabilizing contraction in nationwide house prices does not seem the most probable outcome."

03-24-05 18:37 EST

Copyright 2005 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. All active hyperlinks have been inserted by AOL.