Blunting the 
Effects of Rising 
Interest Rates

With mortgage rates likely to approach 5 percent next year, normalized underwriting standards are crucial.

July 11, 2013

We’re keeping a close eye on mortgage rates. After years of historic lows, rates are on the way up and will likely close in on 5 percent by mid-2014 and go even higher in 2015, from an average 3.5 percent in early 2013. That is unwelcome news for buyers, and we can expect some households to be pushed out of the market as a result.

For example, there are about 17.8 million renter households with sufficient annual income—at least $36,000—to buy a $177,000 home at a 3.5 percent mortgage rate, compared to 14.9 million at a 
5 percent mortgage rate.

One major factor can blunt the harm of rising rates: the return to normal underwriting standards. In fact, lenders, sitting on portfolios of healthy loans, started making financing more available in recent months, and the trend is continuing. I estimate 15 to 20 percent more households qualifying for safe, affordable mortgages as lenders offer conventional conforming loans to households with credit scores in the 720 range, down from 760–770 in the last several years, and making FHA loans available to borrowers with scores in the 660 range, down from 680–700.

What can also spur more buying is improving employment. Job growth reached 2 million over the last 12 months and the same rate is expected in the year ahead.

Additionally, the much improved performance of Fannie Mae and Freddie Mac should lead to a reduction in the fees they’ve been charging over the past few years to recoup their losses from the housing bust. Because of their strong portfolios and the fee increases, they’re making healthy profits. Their priority should be to repay the taxpayer funds they received after the bust, and when that obligation is satisfied, the GSEs should cut their fees. Not only is that the right thing to do as 
taxpayer-owned entities, but it could help households who otherwise might not be able to buy in today’s rising interest-rate environment.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.