In 2005, interest rates have nowhere to go but up.

Economists, lenders, mortgage brokers and others involved in the housing industry can at least agree on that. But they expect the rise to be gradual and don't believe it will drastically impact the nation's housing market.



By the end of 2005, most expect mortgage rates to be in the range of 6.5 percent to 7 percent.



"They're not going to be as good as they had been in the past, but not disastrous," said James Barth, senior fellow at the Milken Institute and finance professor at Auburn University.



Looming over mortgage rate movement is the Federal Reserve's stance on monetary policy and the state of the bond market.



Since June, the Federal Reserve's Open Market Committee has raised its target for the federal funds rate by 25 basis points five times, bringing it to 2.25 percent. The federal funds target rate is what banks charge each other overnight. It has no direct impact on mortgage rates or the bond market, but it can alter them indirectly. A change in the federal funds rate, for example, is likely to change the prime rate, the rate banks charge their best corporate customers. That's generally about three percentage points above the federal funds rate.



From there, any lines of credit tied to the prime rate rise as well. The yields on short-term Treasury bills generally move with changes in the federal funds rate.



Since rates on 30-year fixed-rate mortgages tend to move closely with the 10-year Treasury bonds, any potential increase in the rate of that benchmark bond is likely to drive up mortgage rates as well. And with the overall continuing decline of the dollar against other currencies, it's likely the 10-year Treasury bond will increase regardless of what the Fed does, said Christopher Cagan, director of research and analytics for First American Real Estate Solutions.



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