The Good and Bad of Rising Mortgage Rates

Mortgage interest rates fell this week to an almost six-month low, creating a four-week streak of decreases. If we have seen the bottom of interest rates, how will this play out in the housing market?

This week’s down turn was spurred by the down turn in bond yields after news that President Obama and Congress have agreed to a proposed plan to extend tax cuts and unemployment benefits for two years. Investors had mixed interpretations for that decision as they deemed it both good for the temporary economy and bad for the long-term deficit. Still, it was good enough to cause rates to decrease. The average rate on a 30-year fixed rate mortgage grew to 4.0 percent, excluding fees, according to Freddie Mac, from 4.46 percent the previous week, a rate not seen since the last week of June.

While rising rates might seem like a terrible thing for potential home sales, it might be a signal to would-be borrowers that the dust has settled and that now is the time to buy in before rates rise any higher. This will likely be true of fence-sitters who have simply been waiting out the market, not wanting to buy before rates and prices stop their descent. And perhaps, that surge in sales will lead to a more general feeling of optimism about the housing market and more buyers will feel brave enough to come to the mortgage table.

“Once people see this might actually be the bottom, they go for it,” economist with Capital Economist Paul Dales as quoted in a Washington Post piece.

The flip side is that climbing mortgage rates will almost definitely curb refinance loans in the coming year. For example, as rates rose during the week ended Dec. 8, the Mortgage Bankers Association reported that while home purchase applications were up 1.8 percent, refinance applications were down by 1.4 percent, resulting in a 0.9 percent overall loan application decrease. Most borrowers who could have refinanced, already have, and those who few who still might have refinanced will probably be scared off by higher interest rates.

So, the net effect of rising rates might be zero on the housing market, but we’ll keep our fingers crossed that it spurs some much needed movement in the months ahead.

2012 Home Sales Outlook

The National Association of Realtors is predicting a sunny outlook for the coming year, on the tails of a healthy November increase of existing home sales.

Sales of existing U.S. homes grew 5.6 percent to a seasonally-adjusted annual rate of 4.68 million last month, up from 4.43 million in October. Sales were up 6% percent on a year-over-year comparison.

“Continuing gains in home sales are encouraging, and the positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable,” said NAR chief economist Lawrence Yun. He added “the relationship recently between mortgage interest rates, home prices and family income has been the most favorable on record for buying a home since we started measuring in 1970,” he said. “Therefore, the market is recovering and we should trend up to a healthy, sustainable level in 2012.”

The median home price rose slightly in November, a welcome break to several months of falling prices. The new price inched up to $176,600 from $170,500 in October. The new price was also up 3 percent over November 2011.

Another positive sign was that total housing inventory fell 4.0 percent in November to 3.71 million existing homes, representing a 7.5-month supply at the current sales rate, down from a 9.5-month supply the month before.

While things look good for the coming year, Yun does hint that interest rates will stay low for a while.

“In the short term, mortgage interest rates should hover just above recent record lows, while home prices have generally stabilized following declines from 2007 through 2010,” Yun said. “Although mortgage interest rates have ticked down in recent weeks, overall conditions remain extremely favorable for buyers who can obtain credit.”