Could Rising Mortgage Rates Hamper a Housing Recovery?

by Tara Steele, AGBeat


As the housing sector finally catches a break and begins showing steady signs of improvement, the industry is admittedly sensitive to any negative signs, prepared for the slow but blossoming recovery to end with no warning and for the figurative rug to be pulled out from underneath them.

Several hiccups have led to some minor stress, but the swelling interest rates are truly what everyone is secretly hoping doesn’t put a big fat stop to the progress housing is making.

The Future is Now

Trulia’s Chief Economist, Jed Kolko, says this month is the time to be watching for the impact of rising mortgage rates on home sales. The company dug into the numbers and made some interesting discoveries.

Using data from multiple sources from 1999 to 2013, Trulia traced out how these key indicators of housing activity respond after a half-point monthly mortgage rate spike like we had in May and June 2013. In Kolko’s words:

• Refinancing immediately plummets in the month of a rate spike and then continues to drop in the following months. The current ongoing drop in refis in 2013 is, if anything, smaller than after other rate spikes in the past 15 years.

• One to two months after a rate spike, pending home sales and home-purchase mortgage applications typically decline slightly – which is what we’ve seen after this summer’s rate spike.

• Three months after a rate spike, new and existing home sales typically drop modestly. That means we should see the biggest impact of the May rate spike in August sales data; NAR reported that home sales rose 1.7 percent from July to August, and the Census Bureau will report its home sales findings on Wednesday, Sept. 25, but if it reports any drop in sales, it will be tiny compared with the refinancing plunge.

Longer Term, What Do Rising Rates Mean For the Recovery?

“The recent past shows that higher rates depress mortgage applications, sales and prices, holding all else equal,” Kolko said. “But here’s the hitch: when mortgage rates rise, all else is never equal. In fact, since 1999, higher mortgage rates signaled a stronger economy. The same is true now: a strengthening economy, as well as expanding inventory and loosening mortgage credit, is accompanying rising rates. These other factors will weaken the bite of rising rates and help push the housing recovery along.”



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