Higher mortgage rates are here to stay and they could rise higher -- just not fast enough or high enough to put the breaks on the housing recovery.
That's not to say higher mortgage rates won't pose problems for some housing consumers. They already have. However, there's an overwhelming trend of positive economic factors offsetting rising mortgage rates while supporting a continued housing recovery, according to a recent market analysis by Capital Economics.
By July 11, the average rate on the benchmark 30-year fixed-rate mortgage (FRM) was up to 4.51 percent, exactly a full percentage point higher than it was about two months ago on May 16 (3.51 percent) according to Freddie Mac's Primary Mortgage Market Survey.
During that two-month period, rising mortgage rates slashed the number of refinanced mortgages by half. Refinancing dropped nearly 16 percent the first week in July alone according to Capital Economics, and more homeowners are likely to loose out on higher rates.
Capital Economics expects the benchmark FRM rate to remain around 4.5 percent this year, but rise to five percent next year and 5.5 percent in 2015.
Otherwise, higher mortgage rates have translated into little more than a blip on the housing recovery's radar. Affordability is down, but still above historical averages and buyers aren't leaving the market.
Mortgage applications for home purchases dropped about three percent during the last week in June, but were up over all for the month of June and were up nearly 12 percent compared to than last year, according to Capital Economics.Likewise, existing home sales in May were up 4.2 percent from April this year and up nearly 13 percent from May of last year, according to the National Association of Realtors (NAR).
In a more accurate indication of what home sales might do, NAR's Pending Home Sales Index in May rose to its highest level since the end of 2006. The index is a forward-looking indicator based on contract signings (not closings), which means June and July sales should be strong by NAR's measures.
Double digit home sale increases are already translating into a spike in home prices, according to a variety of reports.
- ClearCapital's report for the first two quarters of the year show home prices up by 8.6 percent.
- CoreLogic's Home Price Index reports prices are up for the year ending in June by 12.2 percent.
- Movoto.com's monthly State of the Real Estate Market for the year ending in June put the annual price increase at 15 percent.
- And NAR reported the national median home price for all existing housing types was up 15.4 percent for the year ending in May.
Overcoming Higher Mortgage Rates
Capital Economics says a host of factors support a continued housing recovery, despite higher mortgage rates.
- While some borderline buyers have been priced out of the home loan market by higher interest rates, rising interest rates are prompting other buyers to move faster and buy before rates get higher.
- Another motivating factor for buyers is the rising supply of homes for sale. Capital Economics says the number of homes coming to market (an annualized rate of 6.1 million) have outnumbered home sales (annualized at 5 million) during the period of March to May 2013.
More homes for sale should slow down the price increases according to Movoto's report. Fueling the demand for homes is the recovering economy.
- The nation added nearly 200,000 jobs to the workforce each month in April, May and June according to U.S. Bureau of Labor Statistics. You can't buy a home without a job. More jobs create more opportunities to buy a home.
- On July 11, the Dow Jones industrial average topped 15,456, surpassing the previous record closing high hit in May. The S&P 500 also topped its May record. More money in investors' pockets is more money to buy a home.
Summing up, Capital Economics reported, "The latest data points to widespread strength in demand across the home-buying timeline. With price gains still going strong, there are few signs that the rise in rates will derail the housing recovery."