Will Rising Mortgage Rates Cool the Market?

July 9, 2013

A big jump in mortgage rates over the past two months may start to cool the rapid rise of home prices in the second half of the year, The Wall Street Journal reports. 

Mortgage rates have shot up from lows of 3.59 percent in the beginning of May, to 4.58 percent during the last week of June, according to the Mortgage Bankers Association. Rates are at their highest levels in two years. 

“A rule of thumb holds that every one percentage point increase in interest rates reduces affordability by 10 percent, so the recent move in rates just made homes about 10 percent more expensive to buyers who need to finance their purchase,” The Wall Street Journal reports.

Still, economists say mortgage rates at 4.5 percent or 5 percent is still very affordable by historical standards. Merrill Lynch analysts say that home prices would have to rise by 20 percent or mortgage rates would have to soar to around 6 percent to chip away at housing’s affordability. 

Some economists see rising mortgage rates as a positive. John Burns, chief executive of John Burns Real Estate Consulting, says that rising rates produce more sustainable price increases. “I don’t think it’s the end of price increases, but I think they’re going to moderate significantly,” Burns told The Wall Street Journal. 

Source: “Why Home-Price Gains Will Slow Amid Higher Mortgage Rates,” The Wall Street Journal (July 8, 2013)

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