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Don’t fear rising mortgage rates just yet: Freddie Mac

The interest rate for a 30-year, fixed-rate mortgage is expected to hover around 4% during the second half of 2013 after rising 0.5 percentage points in the past several weeks, Freddie Mac said in its latest U.S. Economic and Housing Market Outlook.

But don’t expect rising interest rates to stall the nation’s housing recovery just yet.

In most housing markets – barring high-cost cities such as San Francisco, San Diego, Washington D.C. and Boston – housing remains affordable and it would take a much steeper interest rate hike for potential homeowners to feel the economic pinch of rising rates.

In fact, Freddie Mac researchers says at today’s home price and income levels, mortgage rates would have to rise closer to 7% before families with median incomes would find themselves unable to afford a median-priced home.

There is, however, one lingering effect of rates gradually rising. As rates tick up, refinancing volumes are expected to fall. Freddie Mac already expects $1.1 trillion in refi originations in 2013, down from $1.5 trillion in 2012.

With rates on the rise, expect a sharp drop in refinancing volumes in the second half of 2013, the GSE advised.

Still, Frank Nothaft, vice president and chief economist with Freddie Mac, calls today’s fears about rising rates unwarranted in many respects.

"The recent upturn in interest rates is sparking fears among some that the nascent economic and housing recoveries will be choked off before they produce sustained growth," said Nothaft.

But, he added, "Nothing in the recent trends suggests that we need to fear a major slowdown. A gradual rise in interest rates will not derail the recovery, and are an indication that the overall economic situation is improving."

The full report is available here.

Freddie Mac also released a video segment, explaining the various conclusions reached in the report.

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