Will rising interest rates choke off housing recovery?

Capital Economics: Investors need to pick opportunities carefully

Despite expected rises in interest rates and home prices over the next two years, housing will be affordable and, if Capital Economics is right, a little undervalued.

“The upshot is that the recovery in the housing market will continue. But with price growth likely to level off at subdued levels by the standards of recent years, investors will have to pick their opportunities increasingly carefully,” says Paul Diggle, property economist with Capital Economics.

Diggle, along with other economists, is forecasting that the Federal Reserve will start raising interest rates by the end of the first quarter of 2015, with Diggle projecting it will rise to 1.25% by the end of next year.

Based on that, he says, he expects mortgage rates on a 30-year fixed to reach 5.5% by the end of 2015 and a full 6% in 2016.

“The upshot is that housing market activity should continue its gradual recovery,” he says. “Mortgage credit conditions are loosening and households are in a better position to take out loans. Existing home sales have already climbed back to long-run norms, and we expect new home sales to make significant strides over the next few years.”

As for what’s on tap for investors, the sand states and California have largely played out, and some of the best investment opportunities are to be found in Illinois, Mississippi and Ohio, Diggle says.

3d rendering of a row of luxury townhouses along a street

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