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Rising mortgage rates sideline housing recovery

Experts shrug off shocking mortgage application decline

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Mortgage applications took a drastic tumble this week, falling 13.5% from a week earlier, an indication that rising mortgage rates are beginning to take a strong hold on the recovering housing market.

Mortgage rates are continuing to rise, sidelining a number of potential homebuyers and instilling fear into many about what effect this might have on the housing market. The 30-year, fixed-rate mortgage rate reached 4.57%, up from 4.51% the week prior.

Market experts are providing some insight to what’s ahead for the housing market in regards to the impact of rising mortgage rates.

Recent analysis from Trulia (TRLA) on the impact of a rate spike revealed that refinancing applications are typically the first to be impacted — usually within a month of the jump. Wednesday’s Mortgage Bankers Association report showed that the Refinance Index dropped 20% from the previous week; the index has fallen 71% from its recent peak during the week of May 3, and is currently at its lowest level since mid-2009.

According to data from Trulia, refinancing applications fall on average 45% in the month of a spike, and continue to fall for another month or so following the jump in rates. Jed Kolko, Trulia's chief economist, is not concerned with the numbers. "Recent history shows that spiking mortgage rates take a big chomp out of refinancing immediately and smaller nibbles out of sales three months later," Kolko said. "Longer term, the impact of rising rates is typically offset by stronger economic growth. The overall effect of rising rates may turn out to be more bark than bite," he added in a blog post crunching the numbers.

Pending home sales and mortgage applications are usually the next to see a decline, though typically the change isn’t quite as dramatic as refinancing applications see. The latest pending sales numbers from the National Association of Realtors showed a 1.3% drop to an index score of 109.5 in July — down from 110.9 in June.

According to Trulia’s research, new home sales and existing-home sales drop about 3 months after a spike. With this logic, the May mortgage rate spike will likely be reflected in the August sales reports, both of which will be reported later in September.

Danielle Hale, director of housing statistics at NAR, said some of the slowdown may be seasonal. “Now that we’ve seen more gradual increases, we expect that the performance will sort of level off,” said Hale in an interview with HousingWire.

However, Hale did note that pending sales have already started to dwindle in the June and July reports. “We’ll probably see a little bit more weakening, but we’re still at very high levels,” she added.

According to the economist, affordability it still at pretty high levels as well, so anyone who is considering a home purchase may strike here soon. “There is a lot of fundamental demand that’s not going to go away just because mortgage rates are higher,” she said.

But consumers shouldn’t get discouraged; data shows that over the past 15 years, a rise in mortgage rates has directly correlated with an improved economy. Additionally, every measure of housing activity — with the exception of refinancing activity — performs better when the overall economy is doing well.

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