Rising Interest Rates are Killing the Housing Recovery

(MoneyWatch)  Want to refinance your house? With interest rates rising nearly a full point off the bottom, refinancing no longer makes sense for millions of homeowners - and that spells big trouble for the housing recovery and the economy in general.

John Castellani, president of the Washington-based Business Roundtable, told Bloomberg yesterday that the housing market continues to be a drag on the economy. "We believe that if we don't stabilize this vital sector, we can't turn the tide on the recession."

According to the Mortgage Bankers Association, Mortgage interest rates hit a low of 4.75 for a 30-year fixed-rate loan several weeks ago. If you ponied up some cash, you could buy down that interest rate on your home loan to about 4.5 percent (or even less) for a 30-year fixed rate loan. Fifteen-year rates hit 4.3 percent (and I heard from someone on my radio show who managed to snake down the rate even further).

But at 5.57 percent for a 30-year fixed (up from 5.25 last week), you've just eliminated the incentive to refinance for millions of Americans. This isn't a good thing.

While you can't entirely fix the housing market until you figure out a way to keep people employed and earning money, super-low interest rates allow homeowners to lock in more affordable loans and keep even more houses from falling into foreclosure. The government would like to see mortgage interest rates fall to about 4.5 percent, although that hasn't happened yet.

And now, with long-term rates spiking, it doesn't look like it's going to happen any time soon. Did someone say hyper-inflation? Even if hyper-inflation isn't in the cards, perception is reality in this economy.

What can be done to save the housing recovery? Watch for the $8,000 first-time home buyer tax credit to be extended past its current deadline of December 1, 2009. Already, proposals are flying on Capitol Hill to increase the $8,000 limit to $15,000 (which was the original proposal), and elminate the income requirement.

I'll write more about this soon. If you have any other ideas on how to save the housing market, please post them here.