Can Housing Recovery Survive a Mortgage Rate Increase?

There has been much anticipation about mortgage rates lately after hints dropped by the Feds are pointing to a possible slowing down of bond buying. Bond purchases, a move made by the Federal Reserve to boost the economy, have helped keep rates down to historic levels. While it is known that this monetary easing will end at some point, it is unknown whether the housing recovery will survive a mortgage rate increase.

Today, the Fed's stated that, with an improvement to both the growth of the economy and unemployment, the condition of the economy is closer to being met. According to Fed Chief Bernanke, if interest rates increase "for the right reason", it is a good thing. He further stated that an improved economic outlook and proper expectations for Fed policy are satisfactory reasons for rates to increase. Tapering will begin later this year and conclude at the middle of next year if the Fed's forecast are correct.

According to the Freddie Mac Economic and Housing Market Outlook for June, the industry will deal with higher mortgage rates although there are risks involved. Freddie Mac's Office of the Chief Economist noted that even though home prices and rates together increase the cost of housing, rates are still near 60 year lows. Interest rates would have to increase significantly before homeownership would become unaffordable for median income households. However, according to the report, homeownership in high cost areas is already out of reach for many consumers. In addition, as rates increase, traditional refinance activity is expected to drop sharply, although HARP refinances will continue to keep total activity higher than normal.

While it is true that home buyer activity may increase as rates go up, many consumers may find that they no longer qualify. Rising home prices and rising rates also decrease home affordability. Many of these homeowners who would normally use FHA mortgages for home purchases will find that FHA is now limiting the debt to income to 43%. In addition, the higher FHA annual insurance premium also increases the home buyers DTI.

It is true that home prices have been rising in most areas across the country. However, corporate investors have played a large part in pushing prices higher. Homeownership by individuals still remains significantly low. While recent home purchases have been increasing as consumers rush to beat any potential rate increase, affordability may slow that traffic down when rates start rising at a more steady pace.

FreeRateUpdate.com researches and reports advertised rates of active lenders within the FreeRateUpdate.com network.

.