What Rising Interest Rates Mean for the Housing Market
The Federal Reserve has been pumping around $85 billion into the markets to keep interest rates depressed for quite some time now. The lower interest rates are designed to help spur on economic growth by encouraging investment, lending and buying of all kinds, including home purchases.
But, with talks of easing the bond buying program that has blessed us with low interest rates these last few years, 30 and 15 year mortgage rates are ticking up.
Begin the Ascent
Rates have been ratcheting up for over a year now. Just look at the rate progressions for 30 year fixed rate mortgages:
- Last year (September 2012): 3.79%
- 3 Months ago (June 2013): 4.10%
- 1 month ago (August 2013): 4.56%
- Now (September): 4.62%
Most economists agree that the Fed will ease their bond buying but not stop it, so we will continue to see rate increases but no dramatic spikes. However, increase rates (no matter what speed) can have a serious effect on buyer’s attitudes, bank’s willingness to loan and the housing market in general.
Higher Payments, Less House
According to an article on Forbes, “the increase in the 30-year fixed rate from 3.59% in early May to 4.73% at the end of August (according to the Mortgage Bankers’ Association, or MBA) means a 15% increase in the monthly payment on a $200,000 mortgage.” Higher payments mean buyers are forced to buy less house to keep their monthly balance sheets in line.
Any hesitancy on behalf of buyers could stall our fledgling recovery and that’s no good for anyone. But even though you might have to pay more for money now than you did four weeks ago, buyers are reading the economic tea leaves and are trying to lock in rates now before they go even higher.
Not Necessarily a Bad Thing
This rush of buyers looking to avoid higher rates down the road has had a positive effect on the housing market. Homes are selling relatively quickly, inventories are up as more sellers are looking to take advantage of the market and foreclosed homes are finally getting sold off.
Much like high gas prices, buyers will complain and might curtail some purchases but rates must go much higher to seriously impact the housing market. Plus, when interest rates are up and more homes are being sold, the economy is typically doing better.
Forbes points out that, “Since 1999, mortgage purchase applications and all measures of sales activity – NAR pending home sales, NAR existing home sales, and Census new home sales – have actually been higher when mortgage rates were higher. Sales prices were also the same level or higher (depending on the sales price index) when mortgage rates were higher compared to periods of lower rates. Of all the measures of housing activity, only refinancing applications were lower during periods of higher mortgage rates.” Forbes also found that,“Since 1999, the correlation between the monthly unemployment rate – a good, if imperfect, measure of how the economy is doing overall – and the 30-year fixed rate was -0.8, making it a very strong relationship.
With more money to spend and a brighter economic future ahead, buyers won’t consider the impact of higher rates up to a point. So, let the good times roll and let’s all hope the economic spit and duct tape holds it all together.