Will Mortgage Rate Rise Hurt Housing Market?
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. (See “Swift Rise in Yields Pushes Up Mortgages“)
Rising rates certainly doesn’t make it any easier for homeowners to sell. But how much will it hurt? 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.
But rising rates could still squeeze some housing markets because first-time home buyers may find that they’re not able to qualify for as large a loan as they could just four weeks ago. That could put pressure on home sellers to reduce prices. Analysts at Credit Suisse estimate that the recent rise in rates has the same effect as a 7% increase in home prices for prospective buyers.
Bob Dorman, a real-estate agent in Corona Del Mar, Calif., is representing a buyer who now needs to come up with an additional $10,000 in order to qualify for a loan on the $412,000 home he’s under contract to purchase. “How many first-time home buyers have access to that kind of cash?” says Mr. Dorman.
The rise in rates could also have a greater impact on housing markets that still look overvalued. In Sacramento, where Zillow.com estimates that home prices have fallen 45% from their peak, “the perception that home prices have bottomed out will be the driving force over an interest-rate change,” says Larry Knapp, chief executive of local real-estate brokerage Lyon Real Estate.
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