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Mortgage Rate Update (June 8) – Mortgage Rates Continue to Rise… What Next for the Housing Market?

“Rising rates dent home buying attitudes” tweeted Nick Timiraos, a reporter for the Wall Street Journal’s Developments real estate blog.

Timiraos cites a Fannie Mae survey that asks about buyer and seller attitudes towards real estate during the month of June.

Rising mortgage rates will reduce the number of people who can qualify for a mortgage. This drop in “affordability” could reduce demand on the market, which would begin to ease the acceleration of double-digit year-over-year median sales price gains seen during the beginning of 2013.

The second part of Timiraos’ tweet is just as interesting. Just 36% of people believe now is a good time to sell. Part of this negative attitude results from the fact that 44% of homeowners were either underwater or “effectively” underwater (less than 20 percent equity) during the first quarter of 2013, according to Zillow.

The negative perception, though, is part of the reason why the real estate market has fallen into such a supply crunch. Home prices have jumped double digits year-over-year, but many potential sellers don’t realize that the market is in a much more favorable place. I heard this sentiment echoed consistently during talks with realtors for the CCL Reports: Central Coast Real Estate Overview series that profiles the condition of San Luis Obispo County real estate markets.

To jump in ahead of rising mortgage rates and home values, potential buyers increased activity during May, posits CNBC’s Diana Olick.

That could be why pending home sales, that is, signed contracts to buy existing homes, rose dramatically in May to the highest level in over six years, according to the National Association of Realtors.

The NAR report reflects the gradual incline that rates took during the month of May. What the report doesn’t show is market’s reaction to June’s Federal Open Market Committee meeting and Ben Bernanke’s press conference.

Mortgage rates spiked after the Federal Reserve chairman took to the podium on June 19 to discuss the future of quantitative easing, the Fed’s $85 billion per month stimulus bond-buying program. Traders translated Bernanke’s statement of pragmatism – that the Fed would reduce QE as the economy improved – to mean that “tapering” could begin by the end of 2013.

Since then, rates have remained elevated well above early-2013 levels. As of July 5, the yield on the 10-year Treasury was 2.73%, which is the highest since August 2011.

The 30-year fixed rate, which correlates to the 10-year Treasury yield, has moved up, as has the rest of the mortgage rate offerings. On July 8th, the 30-year fixed moved up to 4.250% (4.348% APR) and the 15-year fixed hit 3.250% (3.424% APR). (For full update, click here and scroll down).

Mortgage rates weren’t going to stay at record lows forever. As the economy improved, the Federal Reserve would have ultimately reduced QE.

It is the timing that has some people shocked. The housing market recovery was chugging along as the rate hike hit. Soon enough, we will see data that reflects just how much higher rates will effect demand in the housing market.

We expect to see home price gains slow and perhaps a few less sales, but the prevailing environment is still positive. Employment continues to slowly recover, as does the economy, and real estate pricing is still around 2003 levels. Mortgage rates may be higher, but they are still well below levels seen in the 2003, 2004 and 2005 run up to the housing bubble.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile