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Could rising mortgage rates hamper a housing recovery?

Sensitive from the aftermath of a housing crash, the industry is looking for positive and negative signs regarding the recovery. How will rising mortgage rates impact the recovery?

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Mortgage interest rates and housing

As the housing sector finally catches a break and begins showing steady signs of improvement, the industry is admittedly sensitive to any negative signs, prepared for the slow but blossoming recovery to end with no warning, and for the figurative rug to be pulled out from underneath them.

Several hiccups have led to some minor stress, but the swelling interest rates are truly what everyone is secretly hoping doesn’t put a big fat stop to the progress housing is making.

The future is now

Trulia Chief Economist, Dr. Jed Kolko says this month is the time to be watching for the impact of rising mortgage rates on home sales. The company dug into the numbers and made some interesting discoveries.

Using data from multiple sources from 1999 to 2013, Trulia traced out how these key indicators of housing activity respond after a half-point monthly mortgage rate spike like we had in May and June 2013. In Dr. Kolko’s words:

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  • Refinancing immediately plummets in the month of a rate spike and then continues to drop in the following months. The current ongoing drop in refis in 2013 is, if anything, smaller than after other rate spikes in the past 15 years.
  • 1-2 months after a rate spike, pending home sales and home-purchase mortgage applications typically decline slightly – which is what we’ve seen after this summer’s rate spike.
  • 3 months after a rate spike, new and existing home sales typically drop modestly. That means we should see the biggest impact of the May rate spike in August sales data, which will be reported by Census and NAR later this month. But any drop in sales will be tiny compared with the refi plunge.

Longer term, what do rising rates mean for the recovery?

“The recent past shows that higher rates depress mortgage applications, sales, and prices, holding all else equal,” said Dr. Kolko. “But here’s the hitch: when mortgage rates rise, all else is NEVER equal. In fact, since 1999, higher mortgage rates signaled a stronger economy. The same is true now: a strengthening economy, as well as expanding inventory and loosening mortgage credit, is accompanying rising rates. These other factors will weaken the bite of rising rates and help push the housing recovery along.”

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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