Interest rates on a 30-year, fixed-rate mortgage have risen from 3.35% at the beginning of May to 4.51% in mid-June. This 116 basis-point increase in nine weeks has raised the question whether the recent increase will stall the housing recovery, the bright spot in the economy thus far in 2013.
In a commentary on the impact of rising mortgage rates on the housing recovery, Fannie Mae Economist Mark Palim wrote, “While there is no historical precedent for the effect on the housing market from an increase or decrease in mortgage rates due to the Federal Reserve’s policy of quantitative easing, history suggests that interest rate increases at the level recently witnessed will not stop the current housing recovery.”
Palim continued to note that history shows that a rapid rise in interest rates tends to have little correlation with home prices. Rather, rising interest rates are more likely to be linked to a drop in home purchase volume and a rise in the market share of adjustable-rate mortgages.
He added that from 1992 to today, there have been two instances where housing experienced a meaningful rise in mortgage rates over a short period of time where there has been a noticeable impact of the housing market.
From October 1993 to December 1994, mortgage rates jumped from 6.83% to 9.20%. During this period, the rising trend in existing home sales was reversed.
However, the impact on home prices was muted. The rate of appreciation slowed, but annually price changes remained positive, according to Palim.
Also, from October 1998 to May 2000, mortgage rates rose from 6.71% to 8.51%. Compared to the previous report, this was smaller and more gradual. This longer adjustment period looks to have led to a more muted housing market response.
In this instance, the pace of home sales and the rate of increase in house prices moved horizontally, rather than vertically.