The U.S. housing market is still on a hot streak, as evidenced by yesterday’s Case-Schiller housing numbers which showed home prices rising on average 12.1%. This follows a year-long trend of double-digit annual housing price increases, in which some cities are actually seeing higher home values than before recession.
But for some housing-market analysts there’s a big fly in the ointment that could spoil the housing market recovery for us all: rising interest rates.
As the above chart indicates, the rate for 30-year mortgages has been rising substantially since May — with the last week in June showing one of the largest one-week increases in more than 30 years. Interest rates have a direct effect on home affordability, of course: The higher the interest rate, the higher the monthly payment for any given home price. So why haven’t sharp rate increases slowed the real estate market recovery? Here are a few reasons:
- The Case-Schiller housing index is actually a three-month rolling average. So the June report released yesterday actually includes the months of April and May, before the bulk of the rate increases occurred. Furthermore, since the most extreme rate increases have occurred only recently, they may actually be encouraging buyers to get into the market, as they hope to avoid further increases down the road.
- More home buyers are using all cash. A recent analysis by economists at Goldman Sachs says that 50% of all homes purchased so far in 2013 have been financed without a mortgage, up from 20% before the housing crash. It’s not entirely clear who these cash buyers are, though Nick Timiraos of the Wall Street Journal suggests they’re some combination of “investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale.” Wealthy homeowners who are simply buying homes with cash are going to be unaffected by rising rates, and if many of these buyers fit that profile, that could help explain why rising rates have yet to put a damper on prices.
- Rising rates may signal an improving economy: Economic observers are split over the cause for rising interest rates. Some blame recent hints by the Federal Reserve that it will pull back its stimulus efforts, while others thinks it’s due to increased inflation expectations. A third group argues that it’s simply the result of an improving economy. A stronger economy will often result in higher interest rates, which is why over the long run, higher interest rates don’t correlate strongly with lower housing prices. An improving economy is often enough to cause home price appreciation even in the face of higher interest rates.
For now at least, rising interest rates have yet to put a damper on the housing recovery. That being said, the trend of higher rates has only been with us for a short time, so it may take a while before we really know how home prices will react.