Will Rising Interest Rates Hurt the Housing Market?

Published

June 25, 2013

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Mortgage rates have been extremely low for some time now. However, with rates on the rise once again, some worry that the declining affordability could be harmful to the recovery of the market as a whole.

The number of homes currently on the market remains relatively constrained and that in turn is leading to higher prices every month, as it has for more than a year, according to a report from the Times of Trenton. However, with rising rates, consumers may be less interested in buying, which in turn could likely reduce values and cause growth in that area to decline.

It’s important to note that the issue isn’t necessarily that rates have gone up, but the rate at which they have done so. At the start of May, 30-year fixed-rate mortgages carried rates of 3.35 percent, which was near an all-time low, but by the time mid-June rolled around, these FRMs averaged 3.98 percent. Those for 15-year loans, which are preferred by consumers seeking to refinance their current home loans, rose as well, though slightly less appreciably, to 3.1 percent from 2.56 percent.

Those rates are still extremely affordable, especially when compared to those many current homeowners may now be paying on their mortgages, the report said. However, the added cost of these higher rates is nonetheless appreciable. For instance, on a $200,000 30-year fixed-rate mortgage, an increase of just 1 percentage point can add nearly $1,400 in annual costs through payments into principal balances and interest.

“Even if mortgage rates continue to increase from here, the median home will still be affordable to the median borrower, based on the conventional 25 percent debt-to-income threshold,” said Hui Shan and Marty Young of Goldman Sachs, according to the newspaper. “As a result, rising interest rates will likely slow the strong house price appreciation observed over the past year, but the impact will likely be modest given the cushion provided by the high level of housing affordability at present.”

Home value growth has been expected to level off at least somewhat for a while now, as the improvements seen in the previous 12 months or more were largely considered to be unsustainable, or worse, a sign of another growing bubble. As time goes on and rates grow at more reasonable levels, though, fears of another bubble will likely diminish appreciably.

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