Roosevelt Institute | Cornell University

Increasing mortgage rates is good for the housing market

By Scott GelberPublished May 1, 2013

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Last week the 30 year fixed rate reached its highest level in more than six months showing signs of recovery in the housing market. Although the housing market has been in recovery for the past couple months, increased interest rates may be seen as a threat to the growth of the housing market.
By Scott Gelber, Published 5/1/13

Last week the 30 year fixed rate reached its highest level in more than six months showing signs of recovery in the housing market.  Although the housing market has been in recovery for the past couple months, increased interest rates may be seen as a threat to the growth of the housing market.  The housing market will not be hurt by these rising interest rates for the following reasons:

Rates are still cheap:  Although the interest rates on mortgages have been increasing, they are at a relatively low rate. Many potential homeowners would be wise to buy at today’s mortgage rates rather than waiting for it to increase in the future.

Mortgage rates have no influence over home prices:  Historical trends have proven that the price of housing has not been influenced by mortgage rates.  Housing recovery will be based on other economic factors, such as job growth.

Increasing rates means better economy:  If rates are increasing, two things must be happening in the economy: underwriting standards are becoming more lenient and the economy must be improving.  Underwriting standards improving means that interest rates will rise as more risky loans are originated.  Interest rates were very low at the beginning of the financial crisis in order to increase consumer spending.   Increases in mortage interest rates tend to suggest that consumer confidence is rebounding and that consumers are more able to pay these interest rates, suggesting an economic rebound in housing.

Some may argue that increasing mortgage rates will only be bad for the economy.  The housing market has been mostly bought by banks and investors, not homeowners.  Employment has not been increasing in all areas of the United States.  Having higher interest rates may lead to a higher default rates leaving banks in debt.

Although this is a compelling argument, the interest rates have not risen by an outstanding amount, so rates are still low.  Banks should not be worried about borrowers defaulting any more than before.  As stated before, underwriting standards have improved over the years, and banks will not give loans to borrowers who are not qualified.  Also, the Federal Reserve monitors these rates very closely.  They would not raise the interest rates if they weren’t sure that the economy could handle it.

These signs all indicate that the future of the housing market should be in good shape.  Only time will tell whether these interest rates will hold in the recovery.