Economic insight and analysis from The Wall Street Journal.
Will Rising Mortgage Rates Halt The Housing Rebound?
By Brenda Cronin
Could rising mortgage rates derail the housing market’s slow healing? Economists in the latest Wall Street Journal survey are divided on the question. Among those surveyed, 40% said the rise “won’t have a noticeable effect,” 35.6% warned “it will slow sales” and 24.4% said “it will slow home-price gains.”
There’s no doubting the housing market’s contribution to the overall recovery.Federal Reserve Chairman Ben Bernanke, in starting two days of congressional testimony, on Wednesday told lawmakers that “housing has contributed significantly to recent gains in economic activity. Home sales, house prices, and residential construction have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy.” The Fed chief seemed to place himself within the no “noticeable effect,” camp, but added, “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully.”
In the Fed’s periodic report on regional economic conditions, issued Wednesday, the central bank sounded a relatively upbeat note, saying “Residential real estate activity increased at a moderate to strong pace in most Districts.” The beige book continued, “Most Districts reported increases in home sales.”
Interest rates on 30-year fixed-rate mortgages have jumped in the recent months, climbing in the most recent week to 4.37%, up more than a percentage point from the 3.35% level of early May. However, even with the climb, rates are lower than they have been in decades.
That historical perspective is important, said Stephen Stanley, of Pierpont Securities, who noted “rates were so incredibly low before they can rise significantly and still be incredibly attractive by historical standards.”
Mr. Stanley said the housing market’s healing is likely to continue because—despite the rise in rates—the fact that home prices are going up…is an overwhelming incentive for people.”
John Lonski, ofMoody'sMCO +1.17% Analytics, sees rising rates affecting sales, and points to mortgage applications for home purchases to support his point. During the four-week period ended July 12, those applications were down 5% from their 2013 high, during the four weeks ended May 3, Mr. Lonski said. “This tends to suggest that higher mortgage yields will at least slow the housing recovery.”
He added, “It doesn’t mean that home sales are about to collapse or contract. But they will be slowed by costlier mortgages.”
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Article by Market Leader