Will Home Sales Increase With Mortgage Rates?

It is an interesting question, one that Rick Newman examines in this article for U.S. News and World Report.  The article says that in the short-term, rising rates would benefit the housing market by prompting those who have been considering homeownership to make the plunge before rates rise further.  From the article:

“How long will the buyer’s market last? Conventional wisdom holds that prices will fall another 5 to 10 percent, most likely bottoming out sometime in 2011. As the housingmarket stabilizes, sales will slowly pick up, while the huge backlog of foreclosed and bank-owned homes gets worked off. In healthier markets–like many in the Midwest, where there was never much of a bubble to start with–the housing market might even start to feel normal again in 2011 or 2012.

That outlook is based on the premise that interest rates will stay low, which has seemed likely because the Federal Reserve is pulling all the levers it can to do exactly that. But now something surprising is happening: Long-term rates are actually going up, in defiance of the Fed’s actions. Data from federal mortgage agency Freddie Mac shows that 30-year mortgage rates reached a once-unthinkable low of 4.17 percent in early November, shortly after the Fed launched QE2, its second quantitative easing program. That’s how the script was supposed to play out. The Fed’s plan to purchase $600 billion in Treasury securities through the middle of next year will intensify demand for Treasuries, which in theory should drive rates down on everything linked to them, including mortgages. By the Fed’s reasoning, that ought to make homes more affordable, get buyers off the sidelines, and put money into the pockets of homeowners able to refinance”.

All has not gone according to plan, however.  Mortgage rates have increased steadily for the last month.  The average rate on a 30-year fixed rate mortgage has gone from 4.17 percent to 4.61 percent over the past month, according to Freddie Mac. Rates are now at their highest point in six months.  Interesting, the MBA’s mortgage purchase application index has also been on an uptrend over the last month. This could be proof that rising rates could be beneficial in the short term.

It isn’t clear if the increase in rates is the beginning of a trend, or simply short-term market volatility.  If rates do continue to increase, I will be curious to see at what point there are diminishing returns with regard to increased purchases.  I will also be interested to see what the effect on home prices would be.  The conventional wisdom* is that rising mortgage rates cause home prices to drop.  As home values are already predicted to come down by 5-10 percent in 2011, increasing mortgage rates could cause even larger dips in home prices.

*In a recent New York Times blog post, David Leonhardt took a look at this issue, and found that the relationship between rates and prices was not so clear cut, and that other factors such as consumer sentiment throw off the expected correlation.

In any case, I am curious to know: if you have been considering purchasing a home, do you intend to accelerate your purchase due to increasing mortgage rates?  Let me know in the comments section below.