How rising mortgage rates affect refinancing and home buyingby Keith Gumbinger
Mortgage and other interest rates moved up sharply over the past week, seemingly on little more than optimism that we’ve reached some kind of self-sustaining economic level, and markets reacted as though the Fed has already begun or even finished the “tapering” process of removing QE3. It hasn’t, and even though there are suggestions that they will at some point, there’s no indication that this process is ready to start.
Will rising rates kill refinancing?
Is the rise in rates sufficient to quell refinancing? Yes, to a fair degree.
Refinance waves and booms require several components:
- A period of “high” interest rates over perhaps several years followed by a period where rates are perhaps 1 percent (or more) below the rates available in the initial period. That’s enough to get the ball rolling, but to expand the market for refinancing, rates need to continue to decline, so that more borrowers find opportunities to shed old loans for new.
- Once mortgage rates have stopped declining (and to be fair, even with the spring’s swoon, the lowest rates were seen at the end of 2012, so we have been rangebound at best), the pool of available refinancers begins to become sated as the window for profitable refinancing stops widening. When rates eventually do rise, marginal borrowers (for example, those with an interest rate break of less than 1 percentage point) may head to the sidelines and hope for another opportunity — that is, hope for rates to decline again.
- As such, demand is diminished, excepting those homeowners for whom a 4 percent rate makes their transaction work. If rates hold at 4 percent, that available pool becomes sated over time, too, if it hasn’t been already as rates declined. Homeowners looking to replace old mortgages are of course sensitive to even small moves in interest rates; as an example, applications for refinancing have declined in each of the last three weeks as rates rose, according to the Mortgage Bankers Association.
How rising rates affects buying
That’s much less the case for home buying, where a given interest rate is only one component of the transaction.
The interest rate of the loan does influence the size of the mortgage the borrower can obtain, but being able to qualify to obtain financing is even more so. Potential homebuyers needs to have several other factors in place at the same time:
- Confidence to buy a home
- Finding a home they like enough to buy
- Finding a home at a price they can afford as well as other considerations
Will rising rates dilute the recovery?
Interest rates have not been a problem for some time, and won’t be, even with the nascent rise. Overcoming tight underwriting standards remains a challenge for potential borrowers, but as the economy gets better (more folks have jobs/incomes and savings are rebuilt, debt loads get pared, etc.) more folks can successfully overcome these hurdles to buy or refinance.
Just as firming home prices haven’t seriously dented affordability so far, a slight rise in interest rates doesn’t either. It might crimp demand at the absolute margins, but shouldn’t have much overall effect.