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Rising mortgage rates would not derail a housing recovery because home prices remain highly affordable and mortgage rates can only rise so fast under the Federal Reserve's current policies, according to a new Capital Economics report.
Economist Paul Diggle made those conclusions in a report released this week. Diggle noted it's unlikely the nation will see tighter monetary policy goals in the near future, so mortgage rates can only increase so much over the next few years.
Diggle says rates could go up in the future, considering last week's 10-year Treasury yield increased from 2% to 2.3%, suggesting it may not be that long before mortgage rates soar from current record lows near 4%. The National Association of Realtors predicts mortgage rates will be back above the 5% level in 2014, Diggle asserted.
"But we doubt that higher mortgage rates will derail a housing recovery that in the last six months has seen total home sales rise by 13% and the NAHB homebuilder activity index more than double to 28," Diggle said. "To start with, even though the prospects for economic growth look better than they did a few months ago, the monetary policy tightening that would be required to raise Treasury yields significantly, and hence mortgage rates, is not in the cards."
Even if mortgage rates rise above 5% over the next few years, the monthly payment on a median mortgage would make up only 14% of the current median income.
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