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Higher mortgage rates raise important questions

Kim Last

Kim Last

Between early May and mid-July, the average interest rate on 30-year fixed-rate mortgages rose about 1 percent. Rates on 30-year FRMs have basically held steady since hitting a peak of 4.51 percent in the Federal Home Mortgage Corp. July 11 Primary Mortgage Market Survey. In the Aug. 15 survey, rates averaged 4.4 percent, but they could rise dramatically again.

When mortgages become a bit costlier, things become a bit tougher for home buyers, home sellers, home builders, real estate brokers, the construction industry, the labor market, the service industry and broad economy. Since the housing recovery constitutes a key factor in economic recovery, how worried should we be home loans are growing more expensive?

Analysts are divided about the effects. A July Wall Street Journal poll of economists drew mixed opinions: 40 percent of respondents said more expensive mortgages “won’t have a noticeable effect” on the housing recovery,  but 35.6 percent thought higher interest rates “will slow sales” and 24.4 percent believed higher rates “will slow home-price gains.”

So far, the lure of increasing home values appears to outweigh disappointment over pricier home loans. In the latest Standard & Poor’s and Case-Shiller Home Price Index released at the end of July and covering the month of May, both the 10-city and 20-city composites showed the biggest year-over-year gains since 2006. Rising home and stock prices contribute greatly to the “wealth effect” felt by consumers. So there’s a chance a 1 percent increase in the 10-year yield on U.S.  Treasury bonds — which hit 2.82 percent on Aug. 15 — and conventional mortgage rates might not cause as much damage as feared. After all, both consumer confidence and consumer spending have improved even with a 2 percent hike in payroll taxes and federal budget cuts implemented under sequestration.

Maybe we haven’t seen it yet. The fundamental housing market indicators in our economy constitute lagging indicators, presenting statistics a month or more old. The Case-Shiller composite home price figures are based on three-month averages ending in the latest month of the index. The May survey reflected data from March, April and May, and May is when mortgage rates began their ascent.

New home sales figures compiled by the U.S. Census Bureau must also be taken with a grain of salt. The pace of new home sales reached a five-year peak in May. But here’s the asterisk: the Census Bureau actually measures new home sales in terms of signed sales contracts rather than closings. So a sizable percentage of those homes were not yet constructed, and the actual closing could have been months away. As it turns out, 36 percent of signed sales contracts in May were for homes yet to be built —meaning they were in all probability three to nine months from completion, with most of the involved buyers unable to lock in mortgage rates in early May as they would have preferred.

Which of two outcomes will occur? Summer home sales statistics could reflect the effects of higher mortgage rates. Perhaps the statistics will communicate the housing market is no longer red hot, yet reasonably healthy. The real estate industry, Wall Street and Main Street can all live with that.  

The bigger question is whether or not consumer spending and gross domestic product will keep improving as mortgage rates presumably keep rising. If the economy gathers or at least maintains momentum and the “wealth effect” continues to boost consumer morale, the housing market should see sustained demand — a desirable outcome. If mortgage rates rise due to inflation or some other factor unrelated to growth, then consumers might decide costlier mortgages constitute too much of a stumbling block to home purchases, gains in home values notwithstanding.

Two things can’t be denied. One, consumers have grown more optimistic recently — and wealthier, at least on paper. Two, home loans are still really cheap these days, at least by historical standards. Those two factors could well maintain demand in the real estate market in the face of rising interest rates.

 

This material was prepared by MarketingLibrary.Net and doesn’t necessarily represent the views of the presenting party or their affiliates. All information is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy. Investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.

 

About
Website:
Kim Last is president of Kimberly A. Last Financial Services in Grand Junction. Working in the financial services industry since 1998, Last holds the CFP, CLU and CLTC designations. Her clients include individuals and small businesses. She focuses primarily on retirement planning, including accumulation, tax strategies, distribution, long-term care and wealth transfer planning. Securities and investment advisory services are offered through Brokers International Financial Services, LLC, Panora, IA, Member FINRA/SIPC. Brokers International Financial Services, LLC, and Kimberly A. Last Financial Services are not affiliated companies. These are the views of Peter Montoya Inc., not the named representative, and shouldn’t be construed as investment or tax advice. Neither the named representative nor broker/dealer offer tax or legal advice. Please consult your financial advisor for more information.
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Posted by on Aug 27 2013. Filed under Contributors. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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