Will rising interest rates slam the door on a fragile housing recovery?
No — though that only underscores just how grim the housing picture is.
The rate on the 30-year conforming mortgage has risen to a recent 5.1% from 4.2% last October (see chart, right), tagging along behind an even larger rise in the yield on the 10-year Treasury note over that period.
The jump in the mortgage rate has added around $50 to the monthly tab on a 30-year, fixed-rate mortgage on a median-price house ($170,000 or so) purchased with 20% down, estimates Paul Dales of Capital Economics in Toronto.
Those figures could yet rise further in coming weeks. Many observers expect the yield on the 10-year Treasury rise to 4% or above from a recent 3.6%, amid questions about whether U.S. policymakers have the guts to rein in the galloping U.S. budget deficit. Higher Treasury rates generally translate into higher mortgage rates.
He also expects low house prices to limit the fallout of higher costs that will result from the Obama administration’s makeover of the deeply troubled U.S. mortgage finance system.
“Relatively low house prices mean that affordability remains very high by historical standards,” says Dales.
Unfortunately, that doesn’t mean a housing recovery is anywhere in sight. Few Americans have either the means or the inclination to plunk down $34,000 for a down payment on a house now, regardless of how reasonable the monthly payment might be.
That unwillingness to invest in housing only stands to increase now that house prices are falling in earnest again. House prices fell in 19 of the 20 biggest regions in November, S&P said in its latest survey of national house prices, and the Case Shiller indexes are down around 30% from their 2006 peaks, within a few points of their recent lows.
“High affordability will still not prevent house prices from falling further,” says Dales.