Implications
of Rising Mortgage Rates
Are
they threatening the recovery? Or is their effect overstated?
Provided by Jared Daniel of Wealth Guardian Group
Between early May and mid-July, the
average interest rate on the 30-year fixed-rate mortgage rose about 1%. Rates
on 30-year FRMs have basically held steady since hitting a peak of 4.51% in
Freddie Mac’s July 11 Primary Mortgage Market Survey – in the August 15
edition, they averaged 4.40% – but they could rise dramatically again.1,2
When mortgages become a bit costlier, things can get a bit tougher for
home buyers, home sellers, home builders, real estate brokers, the construction
industry, the labor market, the service industry and the broad economy. As
housing’s comeback is a key factor in this current economic recovery, how
worried should we be that home loans are growing more expensive?
Analysts are
divided about the impact. A July Wall Street Journal
poll of economists drew rather mixed opinions: 40.0% of respondents felt that more
expensive mortgages “won’t have a noticeable effect” on the housing recovery, 35.6%
thought that they “will slow sales” and 24.4% believed that they “will slow
home-price gains.”1
So far, the lure of increasing home values
appears to outweigh disappointment over pricier home loans. In the latest
S&P/Case-Shiller Home Price Index (released at the end of July and covering
the month of May), both the 10-city and 20-city composites showed the biggest
year-over-year gain since 2006. Rising home prices (and rising stock prices)
contribute greatly to the “wealth effect” felt by consumers. So there is a
chance that a 100-basis-point rise in the 10-year Treasury yield (it hit 2.82%
on August 15) and conventional mortgage rates may not do as much damage as
feared. After all, both consumer confidence and consumer spending have improved
even with a 2% hike in payroll taxes and this spring’s federal budget cuts.3,4,5
Maybe we haven’t seen it yet. The fundamental housing market indicators in our
economy are lagging indicators, presenting statistics a month or more old. The
Case-Shiller composite home price figures are based on three-month averages ending
in the latest month of the index – in other words, the May survey reflected
data from March, April and May, and May is when mortgage rates began their
ascent.3
New home sales figures compiled by the Census Bureau must also be taken
with a grain of salt. The pace of new home sales reached a five-year peak in
May, but here is the asterisk: the Census Bureau actually measures new home
sales in terms of signed sales contracts rather than closings. So a sizable
percentage of those homes were not yet constructed, and the actual closing could
have been months away. As it turns out, 36% of the signed sales contracts in
May were for homes yet to be built – meaning they were in all probability three
to nine months from completion, with most of the involved buyers unable to lock
in mortgage rates in early May as they would have preferred.6
Which of two outcomes will occur? Summer home sales statistics may reflect more impact
from higher mortgage rates. Perhaps they will communicate that the housing
market is no longer red-hot, but reasonably healthy. The real estate industry,
Wall Street and Main Street can all live with that.
The bigger question is whether consumer spending and GDP will keep
improving as mortgage rates presumably keep rising. If the economy gathers or
at least maintains momentum and the “wealth effect” continues to boost consumer
morale, then the housing market should see sustained demand – a desirable
outcome. If mortgage rates rise due to inflation (or some other factor
unrelated to growth), then consumers may decide that costlier mortgages are
simply too much of a stumbling block to home buying, gains in home values
nonwithstanding.3
Two things can’t be denied. One, consumers have grown more optimistic
recently (and wealthier, at least on paper). Two, home loans are still really
cheap these days, at least by historical standards. Those two factors may
maintain demand in the real estate market in the face of rising interest rates.
This material was prepared by MarketingLibrary.Net Inc., and does
not necessarily represent the views of the presenting party, nor their
affiliates. All information is believed to be from reliable sources; however we
make no representation as to its completeness or accuracy. Please note -
investing involves risk, and past performance is no guarantee of future
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construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Citations.
1 -
blogs.wsj.com/economics/2013/07/19/will-rising-mortgage-rates-halt-the-housing-rebound/
[7/19/13]
2 - freddiemac.com/pmms [8/15/13]
3 - forbes.com/sites/moneybuilder/2013/08/14/with-mortgage-rates-in-a-holding-pattern-what-will-housing-prices-do/
[8/14/13]
4 - nasdaq.com/article/how-we-know-the-federal-reserve-is-in-control-cm265615
[8/7/13]
5 - usatoday.com/story/money/markets/2013/08/15/stocks-thursday/2658439/
[8/15/13]
6 - realestate.aol.com/blog/2013/06/27/rising-mortgage-rates-impact-homebuilders/
[6/27/13]
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