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Higher Mortgage Rates Won’t Hurt Recovery, Fannie finds
Les Christie / CNN/Money / July 18, 2013
If history is any indication, the recent spike in mortgage rates is going to have little to no impact on home prices, according to a new report from Fannie Mae.
After looking at mortgage rates going back to 1990, Fannie Mae’s researchers came to the surprising conclusion that while rising rates were likely to hurt the number of home sales, they had virtually no impact on home prices.
“History suggests that interest rate increases at the level recently witnessed will not stop the current housing recovery,” the report said.
The study, which compared historic mortgage rates with home price and sales data, focused on two time periods when rates soared. The first, from October 1993 through December 1994, when rates rose to 9.2% from 6.8% and the second from October 1998 to May 2000 when they climbed to 8.5% from 6.7%.
During the rate spike in the early 1990s, home prices leveled off, then fell only slightly. During the second rate climb, there was no impact on homes prices at all.
“What we see through the ups and downs of rate changes is that sellers are reluctant to lower prices,” said Mark Palim, who led the Fannie Mae study. Homebuyers were also willing to find ways to stretch their resources, often by switching to adjustable rate loans, which kept payments affordable for the first few years then were adjusted higher.
In addition, rates and home prices both track economic trends, said Palim. So when the economy is hot, rates rise and so do hiring and income, which means more people are able to buy homes and pay higher prices for them.
Fannie’s research may shine some light on what will happen to the housing market in the months ahead, but some housing experts are skeptical.