Just like the weatherman who would like to always predict sunny skies, there’s little doubt that everyone in real estate favors falling mortgage rates. As rates tumble financing becomes more affordable, borrowers can get larger loans, and homes are easier to sell.
Mortgage rates hit record lows late last year, falling to rates unseen for generations. Among other results, we saw rising home sales in 2012 and increasing prices. The Federal Reserve says residential real estate increased in value by $784 billion.
But now we see that mortgage rates are rising. They are no longer at record lows. That ship has sailed — whether we will again see such rates in the near future is unknown.
So will the real estate recovery end? Not likely. While rates are important they are not the only marker to watch.
Rising Home Prices
The national median existing-home price for all housing types was $208,000 in May, up 15.4 percent from 2012, according to the National Association of Realtors.
“This marks six straight months of double-digit increases and is the strongest price gain since October 2005,” said NAR chief economist Lawrence Yun. “The last time there were 15 consecutive months of year-over-year price increases was from March 2005 to May 2006.”
Is it possible that home prices can continue to rise at the pace seen during the past year? This seems unlikely because as prices grow marginal buyers are forced out of the market. With fewer buyers there is less pressure to increase prices. But price increases at a slower pace are surely possible, especially when one considers that home values remain roughly 11.7 percent lower than April, 2007.
Whether mortgage rates rise or fall the population continues to grow. We now have more than 315 million people but there may be additional real estate demand within our borders.
If we can pass a good immigration bill the economic impact will benefit everyone: According to the National Association of Hispanic Real Estate Professionals (NAHREP) within five years of passing immigration reform we will generate an extra three million home sales as well as $500 billion in additional mortgage originations.
The Federal Reserve
The mortgage rates seen in the past few years are not the by-product of market forces, they instead reflect the impact of Federal Reserve policies. As evidence, interest rates jumped and the stock market swooned as soon as it was whispered that the Fed might reduce its purchases of long-term securities from $85 billion a month to something less.
Can Fed policies be fine-tuned so we have a soft landing? We don’t know, but a good result would be this: As Fed policies evolve, unemployment declines and interest rates rise back to levels more in line with historic norms. The sweet ride of the past year will be over, but what a ride it has been.