The Wall Street Journal
19 June 2013
Rising mortgage rates are pushing up the cost of buying a home just as more local markets are seeing prices and sales climb, but economists say that unless rates move substantially higher the increase is unlikely to derail the U.S. housing recovery.
Mortgage rates have jumped above 4% for the first time in about a year, hitting 4.15% in the first week of June, up from 3.59% five weeks earlier, according to the Mortgage Bankers Association. The rise represents a 15% increase in the cost of borrowing, or around $50 in the average monthly payment on a $192,800 home, the median price of a previously owned home in April.
Buyers, while not exactly pleased, have so far taken the rising rates in stride. Sarah Milligan, a 35-year-old teacher from Glendale, Ariz., who has been hunting for a house in the $140,000 range, recently got a disappointing call from her mortgage broker: Her prequalified mortgage rate is now over 4% from just below that level.
Ms. Milligan, who currently rents a three-bedroom house, says the rate increase won’t change her decision to buy, but she said it could move up her timing: “I should probably try to get one as soon as I can.”
While the rise in mortgage rates remains restrained for now, any prohibitive increase could hurt the housing market and the broader economy, which has been buoyed by the real-estate rebound. Already, the recent spike in mortgage rates has produced a sharp drop in refinancing activity, which is much more sensitive to rate increases.
Low mortgage rates have allowed home buyers to absorb the double-digit percentage rise in prices seen in many regions over the past year. A rule of thumb holds that every one-percentage-point increase in mortgage rates makes homes about 10% more expensive for buyers.
The concerns about rising rates are playing out in the stock market. Investors have sent the Dow Jones U.S. Home Construction Index down 7.6% over the past four weeks, compared with a 1% drop for Standard & Poor’s 500-stock index.
But home builders appear to be unfazed. An index measuring builder confidence hit its highest level in seven years during June, the National Association of Home Builders said Monday. The index rose to a reading of 52, up from 44 in May and the first time since April 2006 that it moved above 50, which indicates more home builders view sales conditions as good rather than poor.
Many economists say the home market is well-positioned to keep growing, though they say rising rates could slow the pace of price and sales gains.
Even with the recent jump, economists say, mortgage rates are still extremely cheap—close to half-century lows. Indeed, applications for home loans, while down slightly between early June and early May, are up 14% from a year ago.
An analysis by economists at Goldman Sachs Group Inc. shows that if rates hit 6%, homes would still be affordable by historical standards. Freddie Mac economists peg that figure at 7% for most parts of the country. The Goldman economists say the recent rise in mortgage rates doesn’t change their forecast of 4%-5% annual home price gains over the next few years.
“Rates aren’t moving far enough where somebody says, ‘I can’t get the house I thought I was going to be able to get,’ ” said Peter Lansing, chief executive of Denver-based Universal Lending Corp.
While rates have yet to curb the appetites of buyers such as Arizona’s Ms. Milligan, that could change if rates jumped higher. In 1994, the 30-year mortgage rate jumped from 7.1% to 9.2% by the end of the year, shutting down a broad-based housing rebound. An annual home-sales gain of 13% that June became a 7% decline the following May, according to Moody’s Analytics. In 1996, rates rose from 7% to 8.3%, slowing single-family home sales from an annual gain of 11% to a gain of just 3% eight months later.
Climbing mortgage rates are one consequence of a sudden rise in Treasury yields in recent weeks, as investors sell off bonds amid concerns that the Federal Reserve will start slowing the bond-buying program it launched last year, which helped push down mortgage rates. Mortgage rates tend to track yields on the 10-year Treasury note. Investors will be watching the Fed, which concludes a two-day policy meeting Wednesday, for any signals about coming policy moves that could have a bearing on the direction of mortgage rates.
The bigger concern for housing buyers is that the supply of homes for sale is low, and that is pushing prices out of their range. “Those are much bigger concerns than whether or which side of 4% mortgage rates are sitting at,” said Greg McBride, senior mortgage analyst at Bankrate.com.
Take Mike Kennedy, who is also looking for a new home in the Phoenix area. He says rapidly escalating prices have offset whatever gains he hoped to make by getting low interest rates. Phoenix-area home prices are up about 20% from a year ago. “It’s nice to have the cheap money, but with the costs of homes going up I’m not sure how much of a great deal it is,” he says. “I might have missed the train.”