Will Mortgage Rate Rise Hurt the Housing Market?

Okay, sorry about the slightly misleading headline. Yes, rising rates certainly makes it tougher for homeowners to sell; but inquiring minds (and economists) are asking just how much will it hurt?

If Americans weren’t buying homes when rates were at 4.25%, what happens now that rates have popped back to 5%?

On Thursday, the average 30-year fixed-rate mortgage stood at 5.09% (with average fees equal to 0.28% of the loan amount), according to HSH.com, a financial publisher. That’s up from 4.8% last Friday. A separate survey from Freddie Mac said rates averaged 4.83% for the week ending Thursday (with average fees of 0.7%), and that’s up from a record low of 4.17% one month ago.

Economists say the impact might not be all that bad if rates are rising because the economy is growing:

“Low rates in a crummy economy are worse for the housing market than somewhat higher rates and an improving economy,” says Thomas Lawler, an independent housing economist in Leesburg, Va.

Moreover, rates are now back to early May levels, when home sales first plunged following the expiration of tax credits. They’re still lower than they were one year ago, and historically, they remain at very low levels. So while higher rates have likely slammed the door shut on refinancing opportunities, rates are just one of a handful of factors that go into a home-buyer’s decision.

“Since the recent rate increases have essentially just undone the declines from earlier months, it is hard to see why sales should drop significantly further from current levels,” wrote Goldman Sachs economist Ed McKelvey in a research note published Thursday evening.

Does anybody else notice that they’re putting the cart before the horse? They have it backwards. They are showing how the rates rising rates are lifting prices. It does not work that way. And throw in the amnesia of the Home Buying Tax Credits expiring, this is the strangest quote seen yet.

The correct way to look at this is that sales have plummeted over the last 3 months even though interest rates fell. The Home Buyer Tax Credits were more of a factor than the lowering of interest rates. Now that interest rates are going up, how can home prices do anything else other than go down more?

The only other factor to get home prices to rise is a growing economy.

Unfortunately, rates are rising and will continue to rise, the tax credit program is gone for good, and the economy is NOT growing.

And that’s scarey.

Next from Goldman Sachs economist Ed McKelvey, “Down is really up…”


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