How rising mortgage rates could boost home sales

If you’re in the market for a home, you’re probably feeling pretty calm: Prices are falling, interest rates are low, and there are few other buyers to compete with. You can probably just hang out for awhile and wait for prices to fall some more. But how long will the buyer’s market last? Conventional wisdom holds that prices will fall another 5 to 10 percent, most likely bottoming out sometime in 2011. As the housing market stabilizes, sales will slowly pick up, while the huge backlog of foreclosed and bank-owned homes gets worked off. In healthier markets—like many in the Midwest, where there was never much of a bubble to start with—the housing market might even start to feel normal again in 2011 or 2012. That outlook is based on the premise that interest rates will stay low, which has seemed likely because the Federal Reserve is pulling all the levers it can to do exactly that. But now something surprising is happening: Long-term rates are actually going up, in defiance of the Fed’s actions. Data from federal mortgage agency Freddie Mac shows that 30-year mortgage rates reached a once-unthinkable low of 4.17 percent in early November, shortly after the Fed launched QE2, its second quantitative easing program. That’s how the script was supposed to play out. The Fed’s plan to purchase $600 billion in Treasury securities through the middle of next year will intensify demand for Treasuries, which in theory should drive rates down on everything linked to them, including mortgages. By the Fed’s reasoning, that ought to make homes more affordable, get buyers off the sidelines, and put money into the pockets of homeowners able to refinance.