How Much Risk are Rising Mortgage Rates to the Housing Recovery

May 29, 2013

by Mike Simonsen

2 comments

A recovery created purely by government largess is no recovery at all.

That’s the strongest argument that our universally hot housing market is ephemeral. It’s true that the hot housing market is due in large part to federal government policy aimed at stimulating and rewarding housing demand. It’s generally a far better deal to own than to rent and the US Government likes it that way.

No place is policy more obvious than in the mortgage markets. By buying mortgages by the truckload since late 2008, the Fed has suppressed rates to ridiculously low levels. I’ve said this before, 3.4% guaranteed for 30 years? I wouldn’t give myself that loan. But this trend can’t last forever, and over the last few weeks, mortgage rates are on the rise. What happens next?

Mortgage Rates as of 2013
Average interest rate on 30-year fixed mortgage, primary residence, across 20 major US metros. Source: Altos Research

Surely this is bad news, right?

Despite recent moves, mortgages are still insanely cheap. See the above chart for the Altos Research mortgage rate monitor.

Slight moves in rates impact the re-finance application rate instantly. Refinancers are hyper-sensitive to rate moves.

For real estate purchases, consider this analysis by Dan Green at The Mortgage Reports. Rising rates cuts into purchasing power. We’ve had a 25 basis point move in rates in May. It’s a sharp move.  For some people, that will mean a 4% lower priced home. A full 100 basis point increase in rates translates into 10.75% less purchasing power.

This is all bad, right? For home prices in 2013, I’m going to argue “No.” Last week, while refinance applications fell by 12%, new purchase applications actually rose 3%. The low-but-rising mortgage rate scenario results in a rush to get in while the getting is good. All of the bullish factors in today’s roaring housing market are still in full effect, so demand is strong.

Mortgage purchasing power
Home price affordability falls as mortgage rates climb. Source: The Mortgage Reports

Rising Rates to Accelerate the Housing Price Surge in 2013

A surprisingly large proportion of buyers in this housing market are all-cash buyers. They’re in the market because homes are cheap, relative to the alternative, prices and rents are rising. Real estate is an attractive place to put your cash this year. This demand cohort is unaffected by rate moves.

Low-but-rising rates actually stimulates demand for people who had not yet seriously committed to buying a home. Because we’re in a supply-constrained market, this extra demand goes right to the prices of the homes available for sale.

To track this scenario, we’ll watch supply and demand levels after June 30.  That’s the day that inventory typically peaks across the country and, for the second half of the year, the inventory is absorbed with fewer and fewer new homes listed for sale, until January 15 of the following year when everything resets.

If rates climb sharply through the end of the year, then continued price recovery in 2014 will be at risk. As of 2013, consider this yet another stimulus spike. We’ll see those leading indicators emerge in 3Q and 4Q of 2013. Altos clients see this data in real-time. Casual readers will have to wait until I get around to writing a blog post.

 

{ 1 comment }

pete moran May 30, 2013 at 12:27 am

Good article overall however I’m seeing at least 30% of the mortgages I originate at or very near maximum approvable debt to income that fha or conventional lending guidelines will permit (note: I do tend to work with a lot of self employed borrowers and tough to qualify borrowers). Relatively small Increases to already low mortgage rates may not reduce the desire for people to want to be homebuyers but it will certainly reduce the pool of buyers able to qualify. Net effect will be a leveling off of home prices and a slight slowdown in sales in the near future.

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