Will Rising Interest Rates Lead to Home Buyer Rush ?

Mortgage rates soared to a two-year high last week, rising by the largest pace since 1987.  (4.46%)  Some economists are predicting 30-year rates to climb to 4.5 percent and 5 percent over the next 12 months, following the Federal Reserve’s recent announcement that it will soon end a program that has kept interest rates near all-time lows for months.

Home buyers may be concerned that the rising rates will dampen housing affordability. But economists say that rising rates shouldn’t derail the housing market recovery.

"Some people might decide to buy a smaller house in a different area, but you won’t see a big decline based just on interest rates," says Jay Brinkmann, the Mortgage Bankers Association’s chief economist. "In the past, you would see a rise in homebuying activity with rate increases. People who are on the fence about buying a home get off the fence in a hurry when rates start to go up.”

As rates have edged up recently, pending home sales have moved up too. They rose 6.7 percent in May from April—at the highest rate since late 2006, the National Association of REALTORS® recently reported.

Analysts also point out that mortgage rates are still low by a historical perspective, even if they do tick up to 5 percent.

"Anything below 6 percent is historically favorable," says Keith Gumbinger, vice president of HSH, a mortgage data publisher.

according to Freddie Mac’s latest U.S. Economic and Housing Market Outlook.

Despite the rising rates, housing still remains affordable. According to Freddie Mac economists, it would take interest rates rising closer to 7 percent before families earning median incomes would face housing affordability issues.

"The recent upturn in interest rates is sparking fears among some that the nascent economic and housing recoveries will be choked off before they produce sustained growth," says Frank Nothaft, Freddie Mac’s chief economist. "Nothing in the recent trends suggests that we need to fear a major slowdown. A gradual rise in interest rates will not derail the recovery, and are an indication that the overall economic situation is improving."

Source: “Mortgage Rates Won’t Derail Housing Recovery, Analysts Say,” Investors Business Daily (June 27, 2013)