Housing Prices Show Biggest Jump in 7 Years — but Here Come Rising Interest Rates!

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If you can’t stand the heat, stay out of the real estate market.

U.S. single-family home prices, as measured by the S&P/Case-Shiller Home Price Index, jumped 12.1% in April from the previous year. This is the fastest increase since 2006 for the 20-city index, which still shows home prices about a quarter off the highs of the real estate bubble.

The strength of the increase was broad-based, with S&P Dow Jones Indices analyst David Blitzer noting in a statement that 13 cities posted monthly increases of more than 2 percentage points. Those range from Charlotte, N.C., (up 2.0% from the previous month and up 7.3% year over year) to San Francisco (up a blazing 4.9% from the previous month and 23.9% year over year). The index, which reflects April data, continues a streak of improvement lasting several months. Even Detroit, the one city that was flat on a monthly basis, has shown a rise of 19.8% year over year.

So the big question now is, Will the party go on if interest rates continue to rise? The past month had seen a leveling up in 30-year mortgage rates of about three-eights of a percentage point, from 3.74% to 4.12%, according to a national survey of large lenders by Bankrate.com, a news and data site. Tomorrow’s weekly survey numbers should come in even higher, reflecting market reaction to an announcement by Federal Reserve Chairman Ben Bernanke that the Fed would start to taper off its support of low interest rates through the quantitative-easing program, nicknamed QE3.

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A double-digit bump in interest rates in June should in theory affect potential homebuyers who are shopping for houses this summer. However, with the data lag of Case-Shiller — remember we just saw April numbers — a slowdown isn’t likely to show up until fall. Until then, the housing market should continue to rocket. If you think that’s a strong verb, some more numbers: Las Vegas up 22.3% year over year; Phoenix up 21.5%, and Atlanta — never really a victim of real estate bubble speculation in the 2005–06 peak — up 20.8%.

Taking a longer-term view to 2014, the concern would be that mortgage rates rise substantially — that is, more than an entire percentage point. Since buyers are concerned about their monthly payments, and a higher cost of financing should lead them to purchase cheaper, or even fewer homes.

Even so, how would such a braking effect kick in? Certainly the recent history of the housing market has not shown any simple inverse correlation between mortgage rates and housing prices. It’s possible that there are instead rate plateaus that consumers notice. Real estate writer Ilyce Glink has pointed out that mortgage interest rates “have stayed at or below 6% for the past two decades.” Taking this view, it might require rates of 7% or even 8% before the housing market reflects that the financial terrain has shifted.

MORE: Why This Housing Upturn Looks Like the Real Thing

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