Here We Go Again: Mortgage Rates Are On the Rise. What's the Impact On the Market?

After seeing rates hit all time lows on the 30-year fixed mortgage, rates it seems are starting to move higher. The press and media are reporting that we're seeing the end of the 30 year bull market in bonds and that rates are going higher from here. Or at least they are not going any lower than what we've seen the last several years. This may or may not be the case. Rates have risen only to come back down again as soon as additional weakness in the economy has surfaced. To be sure, if a sustained weakness prevails in the stock market, the bond market could see renewed interest by safe haven seeking investors. Just the same, what do rising interest rates mean to the average homeowner and the housing recovery?

Typically, rising rates are not beneficial to the real estate market. Higher mortgage rates mean higher payments and less purchasing power for buyers and less incentive for homeowners looking to lower their monthly obligations through a refinance. All of these things result in less economic activity. Less purchasing power means fewer affordable homes for first time homebuyers, a staple of a healthy real estate market. The ripple effect of fewer home sales is difficult to quantify but it can mean fewer sales commissions to realtors and loan agents, fewer sales of furniture and other housing related items, and fewer taxes collected by local governments. The impact can be significant. As rates have been extremely low for some time now and many borrowers that could and did take advantage of the low rates, sometimes on multiple occasions, borrowers of all kinds have become very sensitive to rate movements. Modest rate increases can dramatically affect lending volume, as evidenced by the Mortgage Bankers Association weekly mortgage updates.

Recently, the rise in rates has garnered a lot of attention and created much consternation in the investing community. Many analysts insist it's not rising rates that are causing them concern but the rate at which the rise has occurred. Since the last Fed meeting in the first week of May, mortgage rates on a 30-year fixed mortgage have risen just shy of 1%. For a 30-year conforming loan amount of $417,000, the interest and principal payment would rise just over $29 with a rise in the rate by just 0.125% or 1/8 of 1.0%.  This does not sound all that impressive or substantial. However, to put this in to context, this rise would result in a loss of purchasing power of just over $6,400. Still not impressed? This was by just an 1/8 of 1.0% rise in rates. Rates have risen 7 times this amount by 7/8 of 1.0%. The loss in purchasing power by this move in rates is $41,960. Still not impressed? This is in a month. Now you're impressed. This is why analysts are claiming it's not the rise in rates as much as it is the rate of the rise. If you're a first time homebuyer and you waited a month to move forward with your purchase recently, you were just priced out of the market. So what would be the alternative? Either prices have to come down to meet this new economic reality or fewer homes are sold and the ripple effect discussed earlier takes effect. Neither alternative are that attractive or appealing. For the prospective refinance borrower, these types of moves are deal breakers. Ironically, it's environments like these that often times get borrowers off the sidelines and motivated to effect a transaction. What is so alarming to analysts is how quickly things can turn and how fragile the economy may be to any hiccup in the recovery. For example, a misstep by the Fed in its policies or a black swan event or exogenous event out of our control.

Interest rates will probably rise at some point to what economists describe as normal levels and this will be healthy for the economy. Artificially low rates can cause imbalances and distortions in the economy that may be unanticipated. Ideally this rise will occur gradually and cause few disruptions to the economy. Rates are still low by historical standards and most homeowners should still take advantage of these low rates to lessen the burden of their mortgage payments. Housing prices should find their equilibrium in a rising rate environment where first time homebuyers can successfully purchase a home that is within their budgets.