How Mortgage Rates Could Hurt the Housing Rebound

Brian Hicks

Updated July 5, 2013

Remember when we began to talk of a housing recovery? Well, it seems things have picked up at such a heated pace that we’re now about to wish things didn’t quite move so fast.

house in hand 600x398CNBC reports that the 30-year fixed conforming loan average rate shot up to its highest in two years (average of 4.58 percent) just last week. As a result, new refinancing applications dropped by 16 percent, while the number of applications for new home purchases dropped 3 percent on a week-to-week basis.

From CNBC:

“Last week mortgage rates retreated from a 23-month high as the Fed sought to reassure markets that the wind-down of the stimulus program would be gradual, and contingent upon strong improvement in economic fundamentals,” said Erin Lantz, director of Zillow Mortgage Marketplace.

From early May, mortgage rates have risen by nearly a full percentage point. But for the average home buyer, that means a 15 percent loss in purchasing power (since monthly payments will have risen by 15 percent). That is definitely not encouraging news for the would-be refinancer or first-time home buyer.

It’s true that on a larger historical scale, these rates are still very low (and thus buyer-friendly). However, these same rates are a marked move upward on rates that persisted for the past few years. And that’s what seems to be throwing off the nascent recovery somewhat.

Stimulus Reduction

Adding to these systemic factors are the swirling rumors about the U.S. Federal Reserve deciding to taper off its asset-buying stimulus program. That program has powered much of the early phase of our economic recovery, and there are widespread concerns as to the possible consequences of an end to that program.

The Fed has asserted it will remain highly accommodative in its closure of the program, and it hasn’t even provided any timeline for such a move. Nonetheless, it is generally expected that there will be a shock to the market when that decision is announced.

If, as is expected, the Fed begins making such moves toward the end of this year, that would be why mortgage rates are rising so fast right now. These rates have been on an upward trend since early May, when the Fed first issued comments pointing toward a draw-down of the stimulus program earlier than expected.

It’s precisely because the Fed has been buying up $85 billion in bonds and mortgage-backed assets that borrowing costs and general rates have remained so low (thereby stimulating purchasers to action). But right now, we’re facing unexpectedly rapid bounces in those rates, which is imperiling a very fragile housing market recovery.

Refinance rates dropped to 64 percent of all applications—the lowest since May 2011—while overall mortgage activity (including refinancing and home purchases) was down by 11.7 percent, reports the Chicago Tribune.


Risks of Rising Rates

However, things aren’t quite so bad that the recovery could be knocked wholly off its feet (the reason for that is, as mentioned, the fact that rates are still low on a historical scale). The strengthening economic indicators (unemployment numbers, new jobs added, auto sales, and so on) are also helping boost the mortgage rates to higher peaks than were anticipated at this point.

To put things in focus, the Washington Times has indicated that the current bounce in rates is actually the highest since 1987. Bear in mind that refinancing has been the core of what little recovery the U.S. housing market has experienced so far. That same refinancing activity bore the brunt of the recent rates hike, and that’s what is concerning people so much.

Refinancing drops of 16 percent and new home purchase application drops of 4 percent aren’t really what you want to hear when you’re just about beginning to get into the swing of a recovery. The real question now, of course, is whether this is a temporary spike—caused, no doubt, by worries over the Fed’s next moves regarding its stimulus program—or whether this is the beginning of a more systemic rise in rates across the board. If it’s the latter, we really should be worried.

This is not yet the time when we can expect rates to soar and purchasers to continue to come in droves. That’s for later. And to end on a note of caution: right now, it’s more or less the tail-end of the low-price era. We’ll see a flurry of activity, some fluctuations, and so on. What we should really watch out for is the longer-term trend that should set in after this spate of activity concludes.


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