What Happens If (and When) Rates do Rise?
The humorist Arnold H. Glasow once quipped, “Nothing lasts forever—not even your troubles.” But for many mortgage professionals, it seems that historically low interest rates have been the new normal for a period that seems like forever. But will there be new troubles for the housing market should rates finally begin to significantly uptick?
At the moment, rates remain in their long-running state of stagnation. Freddie Mac’s latest Primary Mortgage Market Survey (PMMS) reported that the 30-year fixed-rate mortgage (FRM) averaged 4.12 percent with an average 0.6 point for the week ending Aug. 14, down from last week when it averaged 4.14 percent. A year ago at this time, the 30-year FRM averaged 4.40 percent. The 15-year FRM this week averaged 3.24 percent with an average 0.6 point, down from last week when it averaged 3.27 percent. A year ago at this time, the 15-year FRM averaged 3.44 percent.
Freddie Mac also reported that the five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.97 percent this week with an average 0.5 point, down from last week when it averaged 2.98 percent. A year ago, the five-year ARM averaged 3.23 percent. And the one-year Treasury-indexed ARM averaged 2.36 percent this week with an average 0.5 point, up from last week when it averaged 2.35 percent. At this time last year, the 1-year ARM averaged 2.67 percent.
Most mortgage professionals agree that the historically low rates continue to have a positive impact on restoring some degree of stability to the post-bubble housing market. For example, the Mortgage Bankers Association (MBA) released its Builder Application Survey data for the month of July, which showed mortgage applications for new home purchases increased by two percent relative to the previous month. By product type, conventional loans composed 68.8 percent of loan applications, FHA loans composed 16.1 percent, RHS/USDA loans composed 1.5 percent and VA loans composed 13.6 percent.
The MBA found that the average loan size for new homes increased from $296,078 in June to $297,253 in July. The MBA also estimated new single-family home sales were running at a seasonally adjusted annual rate of 433,000 units in July, up 12.2 percent from the June pace of 386,000 units. On an unadjusted basis, the MBA estimates that there were 37,000 new home sales in July, an increase of 2.8 percent from 36,000 new home sales in June.
But how long will it be before rates begin to rise again?
“I hope never,” said Grant Stern, president of Morningside Mortgage Corporation in Bay Harbor Islands, Fla., with a laugh, adding that the inevitable rate rise will not a cause for panic. “When rates first go up, we will see a big wave of activity. All of the people sitting on the fence will jump off, one way or the other.”
Stern added that circumstances beyond rate increases will have a more meaningful impact on this environment.
“The housing market and the new purchase market are driven by the costs to rent versus the cost to own,” Stern said. “Rents are up, and people are starting to seek out homes. Even if rates increase a little people, we will still see people moving up into homeownership.”
However, Dean Wegner, a Scottsdale, Ariz.-based originator with Academy Mortgage Corporation, is concerned that higher rates will trip up those seeking a foothold in homeownership.
“Rising rates will continue to shrink the ability of the buyer pool to move up,” Wegner warned. “We are not seeing an increase in wages to keep up with that.”
Wegner believed that rates will stay flat for the next six months, with an upward motion to follow. But if increasing rates have a deleterious effect on the housing market, Wegner predicted that federal government will reset the equation.
“The government will probably interject again and lower rates if they see stagnation in housing,” he said.
Joan Terry McMullin, a private banker at the Alpharetta, Ga.-based office of Wells Fargo Home Mortgage, stated that any notion of a rate increase seems illogical at this time.
“I don’t know how rates can go up,” McMullin commented. “It is the only silver bullet the Fed has to prevent housing from sending us into a depression–not a recession, a depression. I think we’re in a world of hurt, and we’re going to be in it a long, long time.”
Yet Gabe Leibowitz, president and CEO of New York City-based Skygroup Realty, stressed that any forecast on the impact of rising rates is predicated on the levels that could be reached.
“It depends on the extent of the increase,” Leibowitz explained. “So far, there has been a very gradual effect–we’ve seen a small drop in the aggressiveness of the market, if not in the pricing. But if rates go up to six or seven percent and ARMs to 4.5 percent, we will see an impact.”
Leibowitz is optimistic that tumult is not on the horizon.
“Will rising rates kill the market?” he asked rhetorically. “I don’t think so. There is too much demand and too little supply for that to happen.”
Leibowitz added that in markets like New York City that have a significant rental environment, an increase in rates could conceivably be mirrored in an increase in rents, thus helping to push more people into considering homeownership in the event rates would decline again or remain settled.
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