Convinced Rising Mortgage Rates Will Hurt Housing?

Mortgage rates and Home Prices
The chart shows the 30 Year Conventional Mortgage rate published by Freddie Mac and the S&P/Case-Shiller 20 City Home Price Index.  From 2000 to about 2005, rates fell and home prices rose. At the top of the bubble — 2006 to 2009 — mortgage rates were volatile but little changed and prices surged and then fell. Since 2009 mortgage rates are falling while housing prices struggled to recover.  Looking at the last 12-1/4 years,  no strong cause and effect relation can be seen.  While mortgage rates jumped in the last month, there’s more to housing than simply mortgage rates.

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  1. Eliot says:

    The statistical analysis ignores the change in the terms/availabilty of mortgages over the same period which have had a far greater impact on demand for mortgages and housing price appreciation. Underwriting certainly became looser in the bubble: individuals with less than very good credit scores, higher loan to value ratios, low cash downpayments and a broader array of products all contributed to the reduced monthly spend/outlay which contributed to very high demand, despite a higher interest rate environment. Underwriting has reversed itself and demand fell off a cliff, despite low interest rates. Skin in the game and excellent credit scores once again mean a lot to prospective home buyers. To make the above argument hold regarding interest rates and demand, wouldn’t the underlying presumption be that underwriting will once again become looser – high ltvs, acceptance of poorer credit scores, less cash commitments and a greater array of arm and other products – and that these factors need to be in place to test out the conclusion reached?

    • David Blitzer says:

      I agree that credit conditions, qualification requirements and lenders’ attitudes were very different in the 2000-2007 boom period compared to today. However, the point of the post is that an increase of 50 to 100 or even 150 basis points in mortgage rates is not likely to cause a collapse in housing. Given that mortgage rates would still be historically low after an increase of 100 basis points and that houses in many parts of the country are selling at price levels similar to the 2004, a large proportion of buyers aren’t likely to be forced out of the market by a rate increase.

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