Rising mortgage rates shouldn’t block a real estate recoveryby Peter Miller
First, we had the Federal Housing Finance Agency tell us that April home prices were up 0.8 percent for April. Next, the well-known Case-Shiller report also said prices rose in April, the first increase in eight months.
Could this be the start of the long-awaited housing revival? Did we hit bottom in March?
The answer is not clear.
1. Case-Shiller reports that April home prices rose 0.8 percent for the 10-city index and 0.7 percent for the 20-city measure when compared with March. For the past year, the 10-city index is down 3.1 percent and the 20-city chart is down 4 percent.
2. The National Association of Realtors says the national median existing-home price for all housing types was $166,500 in May, down 4.6 percent from May 2010. However, the same measure shows an increase for April’s median price of $163,700.
3. U.S. home prices rose 0.8 percent on a seasonally-adjusted basis from March to April, according to the Federal Housing Finance Agency’s monthly House Price Index. For the 12 months ending in April, U.S. prices fell 5.7 percent. The U.S. index is 19.3 percent below its April 2007 peak and roughly the same as the January 2004 index level.
Let’s imagine that at some point home values will begin to rise. If true, it means there must be a starting point.
Could April have been that moment?
Mortgage rates: The best thing going
We don’t know if April was the turnaround, and the economy is too fragile to suggest any sort of answer. But what very much favors the moment are mortgage rates.
As this is written, you can get 30-year fixed mortgage financing for around 4.7 percent. That’s not the lowest of the low rates, but it’s not that far off. More significantly, relative to historic norms of the past 50 years, today’s mortgage rates are absurdly low.
The catch is that any uptick in economic activity is likely to set off higher mortgage rates. Thus, the improved economy that everyone wants will also produce more expensive mortgages.
Higher mortgage rates…will they be a problem?
But are higher rates really a problem if we see some signs of recovery?
When mortgage quotes go up they typically tamp down home sales and refinancing. This time around, interest levels are so low that a rate increase may be easy to swallow.
For example, if you have a $200,000 mortgage and the rate goes from 7 percent to 8 percent (something not uncommon among the historic mortgage rates seen during the past 20 years), the monthly payment for principal and interest grows from $1,331 to $1,468, a difference of $137. If interest for the same loan is at 4.7 percent and increases to 5.7 percent, the payments go from $1,037 to $1,161. That’s an extra $124 a month.
The monthly cost increases in the two examples above are roughly similar, but what’s not close to similar is the total monthly expense after a 1 percent rate increase–$1,468 versus $1,161. For many households, the second number is a lot more affordable than the first.
A rate increase shouldn’t deter you
The result is that a rate increase is–as always–a marketplace deterrent for homebuyers and borrowers. But perhaps this time around, conditions being what they are, a rate increase won’t be as big of a deterrent.
Interest rates, however, are not the only factor which influences marketplace trends.
Combine low mortgage rates with decimated home values (in many areas) and the attraction of ownership will be increasingly difficult to overlook. Higher rates on less debt may be very acceptable to many would-be purchasers, especially if there’s evidence of recovery in local markets.