As Rates Rise All Else Is NOT Equal

As Rates Rise All Else Is NOT Equal

When it comes to mort­gage rates, all else is never equal. Three fac­tors will com­pli­cate or even off­set the impact of the recent rise in mort­gage rates, even if rates con­tin­ue to climb: the strength­en­ing econ­o­my, expand­ing inven­to­ry, and loos­er mort­gage cred­it:

  1. A post-recession eco­nom­ic recov­ery tends to push inter­est rates high­er as demand for cred­it increas­es and if investors start to worry more about infla­tion. Fur­ther­more, the Fed has said it will taper its bond-buying only if the econ­o­my seems strong enough to weath­er it. Both through mar­ket forces and the actions of the Fed, rising rates should be accompanied by a strengthening economy.
  2. Inven­to­ry has been expand­ing for the past six months on a sea­son­al­ly adjust­ed basis. More for-sale inven­to­ry on the mar­ket slows price gains: in fact, other price index­es have been slow­ing down before the May rate spike could have affect­ed prices, point­ing to expand­ing inven­to­ry as a like­li­er expla­na­tion for the price slow­down. While ris­ing rates and expand­ing inven­to­ry should both slow down prices, these same two fac­tors should pull sales in oppo­site direc­tions. All else equal, ris­ing rates should slow sales, but expand­ing inven­to­ry should boost sales – since more homes can be sold if there are more homes for sale. There­fore, even though this month’s sales data should be slowed by sales, it could be lift­ed by ris­ing inven­to­ry.
  3. Mort­gage cred­it, though still tight, shows signs of loosening, for two rea­sons. First, as they face dimin­ish­ing demand for refi­nanc­ing, banks might look to expand their home-purchase lend­ing instead. Fur­ther­more, new mort­gage rules com­ing into effect next year will give banks more clar­i­ty about which loans are con­sid­ered risky, hope­ful­ly mak­ing banks more will­ing to write mortgages deemed to be safer. The neg­a­tive impact of ris­ing rates, there­fore, could be par­tial­ly off­set by loos­er mort­gage cred­it.
All told, the hous­ing mar­ket and the econ­o­my have a lot of mov­ing parts. Aside from the sharp and imme­di­ate effect that ris­ing mort­gage rates have on refi­nanc­ing, the impact of ris­ing rates on the hous­ing recov­ery is hard to pin­point. This month’s sales reports, cov­er­ing new and exist­ing home sales from August, should show some decline from the May rate spike, but mort­gage rates are just one of many fac­tors affect­ing the hous­ing recov­ery.

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Dated: September 20th 2013
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