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.