Rising Rates Pose Greater Threat Than Initial Indications

Rising Rates Pose Greater Threat Than Initial Indications

10/22/2013 BY: TORY BARRINGER

While maintaining that tight credit conditions and rapid price gains present the greatest threats to the housing recovery, Capital Economics is ready to acknowledge that  may provide rising mortgage rates more drag than the firm’s analysts first thought.

Tracking mortgage applications (as reported by the Mortgage Bankers Association) from May through September, Capital Economics determined that refinancing activity has taken the biggest hit from the 120-basis point climb in rates with a decline of 70 percent.

While the decrease in refinance activity isn’t necessarily reflective of changes in housing market demand, the 17 percent drop in purchase applications over the same period is another story.

“[T]hat was enough to undo all of the improvement in home purchase applications that previously appeared to be underway,” property economist Paul Diggle wrote in the company’s latest US Housing Market Focus. “This has put a dent in hopes that mortgage-dependent buyers are playing a bigger role in the housing recovery.”

Tracking sales, Diggle noted numbers were up initially—an expected result as buyers rushed to avoid further hikes—and then down as the pipeline cleared. The most recent data has been more encouraging, though he says those improvements have largely been driven by investors and cash buyers, groups that are immune to higher mortgage interest rates.

As far as prices are concerned, the lag between sales and price changes makes it hard to tell what the effects have been. However, “[p]rice gains appear to be slowing anyway and, in time, the rise in mortgage interest rates may, at the margins, add to this slowdown.”

There is some good news, though. Heightened rates will raise lenders’ return on new loans, helping to fill the gap left by the decline in refinancing and potentially leading to looser credit conditions.

“The bottom line is that, three years after activity began picking up and two years into the upturn in house prices, the US housing recovery still faces a number of hurdles,” Diggle concluded. “But to our minds, tight credit conditions, an over-reliance on investment buyers and overly-rapid price gains are all potentially more serious challenges than higher mortgage interest rates.

“Nevertheless, the steady rise in rates to date, and the likelihood that rates will rise further still, is another reason to expect the pace of the U.S. housing recovery to slow from here.”

 

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