Mortgage rates spike; will housing market collapse?

I have been warning for some time Mortgages rates: how low can they go?, Have mortgage rates bottomed?, Mortgage rates are rising that mortgage rates were likely to rise and this week they did spike, with the 30 year Fixed Rate Mortgage (FRM) at National Grand Bank in Marblehead increasing from 3.75% to 4%, with the likelihood that the rate will move to 4 1/8% on Monday after movement in the bond market on Friday.

The second part of the headline refers to  a number of comments I have heard in the last few days about how the spike in mortgage rates may kill off the still-recovering housing market. It won’t.

What happened the last time rates spiked?
In the summer of 2013 the Federal Reserve announced that it was considering tapering its purchases of Government securities and mortgage-backed securities under the Quantitative Easing program (QE). Considering. That was enough for the bond market, which pitched what has become known as the taper tantrum, with yields jumping.

In the first half of 2013 the median price of a Single Family Home (SFH) in Essex County was $360,000. Through 5 and a bit months of 2015 the median price is very close to $380,000. In Marblehead the same numbers are $525,000 and $550,000.

How are mortgage rates compared with historical levels?
The answer is: still very low.

Source: Freddie Mac

Source: Freddie Mac

Yes those of us planning to buy may now be wringing our hands because we did not buy when rates were at 3.5%, but rates are still very low by any historical measure.

Will inflation come back and hurt the housing market?
Many of us have painful memories of high levels of inflation in years past and still have some difficulty with the image of a world trying hard to encourage inflation. Whatever critics of QE may say, flooding the economy with cash in recent years likely prevented deflation, a period of falling prices. Deflation is bad news, because it encourages people to delay purchases on the grounds that prices will be cheaper later. That reduces economic activity and at the extreme leads to a depression.

Over time, however, real estate has been seen as a hedge against inflation, an asset whose value will go up with inflation. This seems to me a very simple concept. If the cost of labour and materials rises for say a car we expect the price of a car to go up. Similarly with houses.

What should a buyer do now?
To quote from my earlier reports: “trying to time interest rates, like trying to time the stock market, is unlikely to be a successful strategy. Rates are very low: take advantage of them! The bigger challenge for buyers is finding a house at a time of widespread scarcity.” That remains the situation today.

 If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or Andrew.Oliver@SothebysRealty.com.

Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated

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