Mortgage rates are rising—and Uncle Sam can take it: Erica Alini

Another sign of recovery.

 

All eyes are on Federal Reserve Chairman Ben Bernanke today. He will be speaking in front of cameras at the quarterly press briefing following the Federal Reserve Open Market Committee’s meeting: Will he give any further indication as to when and how the Fed plans to rein in its $85 billion a month bond-buying program? Or rather: Will he say anything at all that the markets could possibly misinterpret and freak out about?

The latter happened on May 22, when Bernanke told Congress: “If we see continued improvement and we have confidence that that is going to be sustained, then we could in the next few meetings take a step down in our pace of purchases.” The markets reacted by pushing up the yield on 10-year Treasurys, and, of course, mortgage rates too. The interest rate on Americans’ favourite residential mortgage, the 30-year fixed rate mortgage, jumped right after that testimony. But concerns that rising rates might take the wind out of the U.S. housing market’s sails seem, as they say, greatly exaggerated.

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Source: Freddie Mac.

Larry MacDonald made the case last week that the Canadian real estate markets can withstand pricier loans, and you could say the same about Uncle Sam.

Here’s why:

1. Hovering at 4%, interest rates are still extremely low by historical standards. On both sides of the border, a small uptick will likely push some undecided wannabe homeowners to make a purchase rather than chase buyers away.

2. House prices are still low—even in markets where they’ve been skyrocketing during the past year. In Nevada they’ve jumped by nearly 25% per year, says TD economist Michael Dolega, but that pales in comparison to the 40% leap they performed in 2004, during the heyday of the housing boom. Even with wages stagnating during this long, slow recovery, the housing market is undervalued in terms of the price-to-income ratio, according to OECD figures.

3. The pace of house price gains could soon moderate, which would soften the effect of climbing interest rates. One reason why the housing market went from dead zone to bidding war battlefield so quickly is that the inventory of new houses is dreadfully low. Building activity has been somewhat subdued, with Tuesday’s housing starts data coming in slightly below expectations, but construction activity should pick up around the end of the third quarter, when the effect of the sequester spending cuts has worn off, says Dolega. There is also some anecdotal evidence that builders “are trying to constrain inventory to push up prices,” he adds. That might help reconcile the subdued housing starts with the latest reading of a survey of home builders, which indicated that over half of builders surveyed thought sales conditions were good rather than poor for the first time since 2006.

4. Finally, whereas rising mortgage rates might chase away some investors—those who aren’t making cash purchases at least—buyers who are in the market to purchase a home for shelter should be more resilient. Admittedly, credit conditions remain (unreasonably) tight, but as the labour market improves, more people will be climbing up the credit score ladder and, hopefully, become eligible for a prime mortgage.

Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.

 

 

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