How Higher Mortgage Interest Rates Will Dent U.S. Housing Market Recovery

By: Money_Morning

Gary Gately writes: How much do higher mortgage rates reduce home sales?

That, of course, depends on how much rates rise and whom you ask. But there's no doubt higher mortgage rates hurt sales, experts say.

Interest rates have been climbing since May. Rates on 30-year, fixed-rate mortgages averaged 4.37% for the week ending July 18, Freddie Mac's weekly survey of conforming mortgage rates said. That's up more than a percentage point from early May.

And existing home sales fell 1.2% in June, to a seasonally adjusted annual rate of 5.08 million, from 5.14 million in May (but still 15.2% higher than in June 2012), the National Association of Realtors said Monday.

Lawrence Yun, the NAR's chief economist, told Money Morning he expects interest rates to hit 5% to 5.5% within a year. And while he foresees existing home sales rising as much as 10% for 2013, he predicts only a single-digit percentage increase next year primarily because of higher mortgage rates.

"There's no risk of any reversal of this housing recovery; it's just slowing the pace of this housing recovery," Yun said.

He said robust demand and affordable prices would lessen the impact of the higher mortgage rates in much of the country, but pricier markets in New York, parts of California and Hawaii would be hit harder by the higher mortgage rates.

Why Higher Mortgage Rates = "Very, Very Modest" Gains

Joel L. Naroff, president and chief economist at Naroff Economic Advisors Inc., told Money Morning he expected "very, very modest" gains in existing home sales as interest rates increase.

The rate increase, of course, will depend largely on the Federal Reserve's quantitative easing, Naroff noted.

And the Fed's decision on how much to taper QE and when will hinge in part on how much the economy grew in the second quarter, which will be revealed next week in second-quarter gross domestic product numbers.

Naroff pointed out that some economists believe second-quarter growth could come in as low as 0% to 1.5%, even lower than the feeble 2% growth for the first quarter.

"There's a lot of uncertainty in that number and it will make a difference in the Fed's decision-making and therefore in the interest rates," Naroff said.

The prospect of higher mortgage rates could prompt those on the fence about buying a home to go ahead with their purchase, driving sales up for the short term.

"You could see sales picking up but that won't necessarily indicate that the market's getting stronger," Naroff said.

"It might simply indicate that people who are afraid of even higher rates make decisions. That's why as we get the numbers over the next two or three months, the markets may jump to conclusions but economists are going to be encouraging investors to say, 'Hey, slow down before you're convinced one way or another.' Unfortunately, that's very much the situation here: It's a wait-and-see."

Why the Market Can Weather Higher Rates

With the Fed widely expected to begin tapering later this year, those in the real estate business, not to mention homebuyers, are bracing for higher rates.

But the housing market will be able to withstand them - with existing home sales growing at perhaps 6-8% in the coming year, Naroff says, as opposed to the 15% over the past year - largely because of the strength of the nascent housing recovery.

Along with existing homes, sales of new, single-family homes have also been on a tear, surging from April to May at the highest rate since July 2008 - and by 29% over the previous year.

And the national median existing home price for all housing types was up 13.5% in June - up 13.5% from June 2012, NAR said Monday. That marks the 16th consecutive month of year-over-year price increases - the first time they've increased for that long a span since June 2012.

Experts have cited an improving job market, low mortgage rates, high demand and a shortage of housing on the market among reasons for the strength of the housing market.

Even the prospect of higher rates could have an upside, Jed Kolko, chief economist at the real estate website Trulia.com, told Money Morning.

Kolko noted the Fed has said it would taper only if the economy is strong enough, thus higher interest rates likely would be accompanied by a stronger economy.

And as rates rise, Kolko said, fewer people will refinance, which may prompt banks to increase their lending for home purchases as their refinancing business dries up and to ease credit standards.

"The strengthening economy and possibly also looser credit should mean that rising rates won't make too much of a dent in prices or sales," Kolko said.

Will the housing recovery continue or will it bomb because of higher interest rates? Let us know what you think in the comments section below.

Source :http://moneymorning.com/2013/07/22/how-higher-mortgage-rates-will-dent-housings-recovery/

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