The economy seems to be walking on eggshells.

For the first time since last March, 30-year fixed rate mortgages are above six percent. How concerned should homebuyers be? And how will rising rates affect the real estate market?

Some economists are worried that the FED may have cut short-term interest rates one too many times, suggesting that inflation is rising too rapidly to control by other means. This has a trickle-down effect on mortgage interest rates, causing them to rise in self-defense.

What's happening is that the U.S. wholesale prices rose nearly two percent in September, the biggest jump in 31 years. The culprit is wholesale energy prices, which shot up over seven percent, again, the biggest jump in 15 years. Food prices are also up, particularly in perishables like eggs which posted a record 49 percent increase.

Core prices, which don't count food and energy prices, increased only slightly, which is good news for consumers. But, as CNN economics correspondent Ali Velshi points out, consumers look closely at what they pay at the pump and in the grocery store check-out. They want to see those prices come down and soon.

Fear that prices could get worse before they get better caused consumer sentiment to erode in October, according to researchers at the University of Michigan. Retailers are already worrying that high energy and food bills will be the nightmare before Christmas, causing this to be the first holiday season in decades that Americans will buy less than they did the year before.

Reports from around the country suggest that home sales are taking a breather. Stalling house prices are causing some Americans to feel a little less wealthy than last year. Rising interest rates will definitely slow refinancings down. For those reasons, Realty Times predicts a slowdown in the number of homes being sold and offered for sale.

Forty percent of homes are owned free and clear. Sixty percent of homes with mortgages were sold after 2001. We believe that homeowners, who have fairly new loans or none at all, will choose to sit on their equity nest egg and keep it warm for a while. They realize that flattening prices won't help them reach their goals of high returns at the present time.

This could put further pressure on homebuyers to also pull back causing the real estate market to undergo a wait-and-see stalemate, which is also currently happening in the stock market, as well.

Realty Times predicts that buyers and sellers won't have to wait long. Sooner, rather than later, a homebuying spree will begin again due to a better-than-expected job report and the continued lack of a better place to put money than in a home.

"In spite of the job losses caused by hurricanes Katrina and Rita, the employment report was better than had been expected," said Frank Nothaft, Freddie Mac vice president and chief economist. "This indicates that economic growth is likely to accelerate in 2006. That acceleration of growth, coupled with the specter of higher energy costs, will translate into higher long-term mortgage rates in the coming months."

Mortgage interest rates also appear to be pausing at just above six percent, but homebuyers should keep in mind, that mortgage interest rates are historically much higher, and that six percent rates are equal to what rates were over 30 years ago.

Published: October 21, 2005

Use of this article without permission is a violation of federal copyright laws.