Monday, June 10, 2013 / by Nathan Clark
In case you missed it, a bit of history was made last week.
Well, kind of. It’s more like an unprecedented era finally came to an end.
Mortgage rates have been creeping upward after a long run of historical lows, and last week’s national average of 3.91 percent on a 30-year fixed-rate loan seems to signal the end of the line for ultra-low rates.
While potential home-buyers are probably lamenting the rising rates, it’s important to remember that we’ve had it good for a long time. The term “historical low” gets used so much that it loses its impact over time, but mortgage rates literally dropped to the lowest they had ever been. History was made.
And where do you go from historic lows? There’s nowhere to go but up. It was going to happen.
But now people are wondering if rising rates will derail the housing recovery theU.S.is undergoing. Prices, we know, are rising faster than many would have expected, say, a year ago. If mortgage rates continue to rise, will affordability be an issue?
The effect of mortgage rates on the recovery might not be as drastic as you’d expect, though. There are several reasons for this.
First off, while ultra-low rates make homeownership accessible to more people because they impact debt-income ratios, nobody buys a home because of low rates. You’re either in the market for a home or you’re not. Low rates are a facilitator, not a cause. You’re not going to wake up one day, see the low rates and decide you have to buy a home.
Secondly, especially in the short-term, the creeping up of rates is actually going to spur the recovery further. If there are people on the fence when it comes to investing in a home, they might feel pressure to do it sooner rather than later. People who were already potential buyers are likely to move their timetable up.
This has happened already, in fact. According to one report, last week’s rate climb dropped the applications for refinancing homes by about 12 percent. But the number of applications for home purchases rose by 3 percent.
The other important thing to keep in mind is that just because you might have missed out on the 3-percent rate of a few months ago doesn’t mean you’re too late to the party. Five or six years ago, we’d have thought the idea 3.5 percent was downright crazy. You wouldn’t have ever imagined it. Now, though, we’re going to complain because rates are getting close to the 4-percent number? If you got a 30-year, fixed-rate loan today, you’d still get a lower rate than you could have possibly imagined just a few short years ago.
We might be sad to see the days of ultra-low rates go, but in some ways it’s a good thing. It’s definitely a sign that the economy is in better shape than it was a couple of years ago. Rates drop to ultra-low levels when the economy is in bad shape, and since the end of the recession about four years ago, recovery has been slower than expected. That rates are ticking up now is a sign of a healthier overall economy.
That, in turn, is good for the narrower real estate sector. Unemployment is declining. People have equity in their homes again. Sellers are having to compete with fewer and fewer distressed homes on the market. Those factors affect home sales more than interest rates do.
In fact, I don’t buy the doom and gloom predictions of rising rates derailing the real estate recovery – if for no other reason than we saw for a long time that really low interest rates were not a primary driver of home sales.
The fear of buying a home and having it drop in value is what kept people from buying homes. The inability of homeowners to sell for what they owed on a current home kept them from buying a new home. Rates were super-low for a long time before home sales gained steam. The recovery has been helped by the affordability of house payments, sure, but it’s not the reason for the recovery.
Which means rising rates aren’t going to suddenly bring the recovery to a screeching halt.