Mortgage rates, which at the beginning of May stood at 3.59% for the average 30-year fixed-rate loan, jumped to 4.68% during the first two weeks of July, the latest available data, according to the Mortgage Bankers Association. That is the highest level in two years.The U.S. housing recovery that began unfolding early last year faces its first serious test: In the span of just two months, mortgage rates have jumped by a full percentage point, something that has happened only twice since 1994.
Bloomberg News
A 'sold' sign outside a home in LaSalle, Ill., last month. Economists say that even at a 4.5% or 5% mortgage rate, housing is still affordable by historical standards.
Economists say that even at a 4.5% or 5% mortgage rate, housing is still affordable by historical standards—and that rates could rise to 6% or prices could rise an additional 20% before housing would become unaffordable relative to historical levels.
The spike nevertheless represents a big payment shock for would-be buyers. Many shop for a home based on their monthly mortgage payment. The monthly payment of principal and interest—and not including taxes and insurance—on a $200,000 home with a 10% down payment just went up by more than $100, to $925, while the monthly cost of a $450,000 home just went up by around $250, to $2,095.
Does this mean the housing recovery is over? No, especially if rates rise because the economy is improving. "Prices will still go up, but it will be much more difficult to raise prices, which is a good thing because the momentum was heading for a bubble," said John Burns, chief executive of a home-builder consulting firm in Irvine.
For now, industry executives say the biggest problem facing buyers is the shortage of homes available for sale. "I don't think rates are going to be an issue in the near term," said Richard Smith, chief executive of Realogy Corp., which owns the Coldwell Banker and Century 21 real-estate brands. "You're going to continue to see tight inventory. Pricing is going to continue to go up."
Data tracked by housing analyst Ivy Zelman show that the ratio of homes for sale as a share of total U.S. households was at its lowest level in more than 27 years during the first quarter, at around 1.5%. Over that span, prices have increased whenever that ratio has fallen below the median of 2%.
But there are other reasons that suggest rising rates could matter more than they have in the past. Lenders have been slow to ease credit standards that tightened up sharply five years ago. Many would-be buyers still carry high debt loads relative to incomes that aren't growing much.
While mortgage rates on traditional loans are at a two-year high, the cost of mortgages backed by the Federal Housing Administration, which allow buyers to make down payments of just 3.5%, are even more expensive because the agency has boosted insurance fees.
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