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Will higher mortgage rates kill the housing recovery?

October 21, 2013

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Housing and the economy

Q: I'm not a believer in the housing market recovery. My concern is that it was all a product of unusually low interest rates. Now that mortgage rates are moving up, don't you think it will scuttle the housing recovery -- and the rest of the economy along with it?

A: There's no question that record low mortgage rates helped the housing market recover. The question is, with that having been the case, can the housing market survive without those unusually low mortgage rates? There are four factors to think about in this discussion:

  1. Current mortgage rates. While rates were nearly a full percentage point lower earlier this year, current mortgage rates are still very low from an historical viewpoint. Remember, mortgage rates were around 6 percent for most of the housing boom, so a rally in housing certainly should be able to survive rates that are a little above 4 percent -- if all other economic factors are in good shape, which may not be the case.
  2. Federal Reserve policy. Of course, one reason mortgage rates have been so low is because of Federal Reserve intervention. Once the Fed starts to cut back on this intervention, the critical issue will be not so much how far mortgage rates rise, but how fast. A steady rise in rates as part of a broader recovery would probably be taken in stride, whereas too fast a jump could come as a shock. Given that the whole purpose of the Fed's intervention was to stimulate a fragile economy, there is every indication that they will err on the side of caution when unwinding their stimulative programs.
  3. The housing market. Another way to look at the question is to consider whether housing prices have really recovered. Nationally, they are still some 20 percent off their 2006 peaks, though it now appears those peaks were products of unsustainable speculation. This is a good time to be cautious about real estate in specific markets where speculation may be heating up again.
  4. Housing and the economy. The real issue for the housing market is whether there will be enough economic growth to sustain it. Without growth in wages and jobs, the market will lack a steady supply of new buyers to support prices. Thus, employment may be a bigger factor than mortgage rates in the future of the housing recovery.

All things being equal, the housing market can thrive with higher mortgage rates -- it has often done so in the past. The bigger problem is the environment of uncertainty that has been created by the repeated fiscal battles in Washington. That uncertainty discourages businesses from hiring, and no recovery can survive without jobs.

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