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Inflation worries, caused by steep rise in consumer spending accompanied by a rise in inflation, have resulted in major lending institutions to raise their 30-Year mortgage rates to above 6 percent. The average rate rose to 6.17 percent in some markets, compared with less than 5.96 percent reigning till lately. Financial analysts consider the worry about inflation to be a major factor in the rise of long-term bond yields over the past week, which has a direct effect on mortgage rates. Many of the analysts are also expecting a marked slowdown in consumer spending in the immediate future as the worry over the housing market and credit markets persist.

One of the chief reasons why the housing market is in a slump is because sub-prime credit is becoming harder to obtain in many markets. This has led to a glut of housing on the market and is expected to worsen further. Many credit analysts predict that further concerns over inflation and consumer debt will lead to even tighter credit standards that will be practiced by many of the major lenders. After almost five years of boom activity in the housing market, a severe slump is now underway and sales have considerably dropped and home prices have fallen substantially. Home sales were down almost 9% since the same period last year, and an astounding 34.4% compared to 2005.

Now it is learnt that delinquencies on mortgage bills have spread well beyond those with sub-prime credit and this demonstrates that even prime borrowers have increasingly fallen behind on their house payments. The figures may appear small so far but if delinquencies on prime loans— given only to those with good credit — could rise further, then the housing crisis may prolong indefinitely. As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are also falling behind on their payments for home loans. The rise in prime delinquencies, while less severe than the one in the sub-prime market, nonetheless poses a threat to the battered housing market and weakening economy. Unlike sub-prime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges.

Amid worries over inflation, mortgage rates have surged to new highs. According to Freddie Mac, rates on 30-year fixed mortgages rose to 6.32 percent which is nearly a quarter of a percentage point compared to previous weeks. The last time the 30-year fixed rate mortgage was higher was Oct. 25, 2007 when the rates were even higher - at more than 6.74 percent.

With the growing concern of inflationary trends in America and abroad, sales are not expected to rebound before 2009. Meanwhile, mortgage issuers are obviously trying to protect their financial assets by adopting less risk which is leading to higher mortgage rates, especially on long-term loans. Given the current backlog of housing on the market, it would take another 9 to 10 months to clear the glut from the pipeline according to industry experts.