SAN JOSE -- A leading housing economist predicted Thursday that recent increases in mortgage interest rates will level off next year and housing sales across the nation will remain strong.

"We see prices continuing to rise and we expect rates to be about 5.1 percent maybe up to 5.25 percent," said Ken Fears, economist with the National Association of Realtors.

Fears spoke at the Santa Clara County Association of Realtors annual convention here, the association's first since the housing market crash five years ago.

Fears noted that more than a year of falling interest rates was reversed in May with concerns over an end to the Federal Reserve's program of bond buying, which has helped keep interest rates down.

Mortgage rates have increased more than a percentage point since May, although Thursday, they dropped to 4.5 percent from last week's 4.57 percent, according to a report from Freddie Mac, one of the two government-controlled entities that buys mortgages from lenders.

Meanwhile, sharply rising prices have pulled more homeowners out from underwater on their mortgages -- where homes are worth less than is owed on them, Fears said.

That has led to declines in foreclosures and delinquencies, reducing the inventory on banks' balance sheets and lowering the potential for a future wave of foreclosures.

And that portends a return to more conventional lending standards from the high down payments and high credit scores currently demanded by lenders, he said.


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The tight standards have been reflected in a higher percentage of sales for cash rather than with mortgages.

Banks also have been more comfortable making loans to people buying more expensive houses than cheaper ones, presumably because they have stronger credit. Jumbo loans usually carry higher interest rates than conforming loans, but that pattern was reversed recently, Fears noted.

Recently, "it was cheaper to finance a large home than one of the lower-priced homes," Fears said.

Fears said the NAR expects prices to continue to rise.

Locally, the Santa Clara County Association of Realtors reported that the August average sale price for a single-family home was $1,017,528, up from $859,533 a year ago.

But the number of homes for sale in August dropped to 1,978 from 2,371 in August 2012, the association reported.

The convention was expected to draw a crowd of 2,100 real estate agents. Association President Carl San Miguel said there will be one next year.

"I think it slipped through the cracks, and in 2009 we were just coming out of a terrible year," San Miguel said.

"We thought now it's time to bring it back and everybody is so happy that we did."

Contact Pete Carey at 408-920-5419. Follow him at Twitter.com/petecarey.