Could A Mortgage Rate Hike Spur Sales?

An article on the Wall Street Journal website today made the bold assertion that an increase in mortgage interest rates may actually stir up some activity in the housing market.

Interest rates have been at all-time record lows for a month now, with the 30-year fixed rate loan averaging down to 4.32 percent last week, according to mortgage giant Freddie Mac. And for a myriad of reason, these low rates have not garnered much change in home purchases or mortgage refinance applications. For example, according to the Mortgage Bankers Association’s application index, total loan applications have only averaged an increase of 5.2 percent for each of the past four weeks.

In the article, author Kelly Evans points out that

“One reason buyers have possibly remained hesitant is that there is little reason to act if rates may fall even further, a classic deflationary mind-set.”

She says that rates are likely to increase in the next week or two, following an increase in bond yields for U.S. Treasuries, the key determinant in mortgage rates. Those yields rose in response to some positive economic indicators this week, like improved private-sector hiring stats. And that bond yield jump is very likely to bring mortgage rates up with it.

So this increase may give potential buyers and refinancers the sense that they have to make their moves now before rates continue to go up. That makes sense, but it is also believable that higher rates may not be the psychological jump start the economy needs. There are probably still plenty of borrowers who bought or refinanced high into adjustable rate loans who have been able to keep up with their payments because rates have stayed so low, but new higher rates might push them into default, adding to a new wave of foreclosures which could further depress prices and flood the market with inventory.

Hard to say which is more likely, but at the very least, I would welcome slightly higher mortgage rates if they are a sign of real economic recovery.

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