Higher Mortgage Rates Bear Down On Housing Recovery

Higher mortgage rates are affecting different people in different ways. Some are hopping off the fence and looking to buy before rates increase further. Others are stepping back, concerned about affordability. Still others are heading for the hills -- renting's not so bad after all.

A recent survey by online real estate brokerage Redfin found that 63 percent of respondents indicated that rising mortgage interest rates are making it harder for them to afford a home. From August 23 through 26, Redfin surveyed 1,722 home buyers from 22 U.S. markets and found that rising mortgage rates caused 33 percent to speed up their search and 20 percent to slow it down. Just one percent took a hike up the hill.

Mortgage Roller Coaster

In the week from Sept. 6 to Sept. 11, mortgage applications slid 13.5 percent, according to the Mortgage Bankers Association's (MBA) Weekly Application Survey. Nearly one in four applications. Poof! In one week. The Refinance Index took the brunt of the plummet. It has fallen 71 percent from its recent peak the week of May 3, 2013 and is at the lowest level since June 2009. The seasonally adjusted Purchase Index decreased 3 percent, but the unadjusted purchase Index tumbled 14 percent, both during the Sept. 6 to Sept 11 period.

When rates dropped the following week, however, applications edged up 11.2 percent, and the week after that, they rose another 5.5 percent.

Higher Interest Rate Impact

Applications plunged largely because according to Freddie Mac, mortgage rates hit two-year highs.

"Mortgage interest rates are at the highest level in two years, pushing some buyers off the sidelines. The initial rise in interest rates provided strong incentive for closing deals. However, further rate increases will diminish the pool of eligible buyers," said Lawrence Yun, National Association of Realtors' (NAR) chief economist.

He also said rising rates reduce affordability and the impact on the market is showing up in both home sales and prices, at least during the short term.

Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.5 percent to a seasonally adjusted annual rate of 5.39 million in July from a downwardly revised 5.06 million in June, and are 17.2 percent above the 4.60 million-unit pace in July 2012, according to NAR.

That's good news, but it's a rear-view mirror look.

Take a look at what's to come in NAR's latest Pending Home Sales Index.

The forward-looking index declined 1.3 percent to 109.5 in July from 110.9 in June.

And for prices? NAR's median home price hit $213,500 in July this year, up 13.7 percent above July 2012, but down from its previous month's $214,200.

"Our survey results underscore buyer sensitivity to this summer's mortgage rate fluctuations," said Redfin economist Ellen Haberle. "Should interest rates spike again in the coming months in response to a tapering by the Federal Reserve of asset purchases, we could see a significant drawback or even a temporary freeze in buyer activity."

It's going to be a blustery fall. Rate watchers would be smart to get approved for their purchase or refinance so they can lock in when rates blip into their target range. If it doesn't happen, they can always climb back up on the fence.

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