The Biggest Lie About Spiking Interest Rates
Talk about myopia!
For 18 months straight, I’ve been chronicling the “huge recovery” in residential real estate, as one of the nation’s largest homebuilders recently put it.
I’ve ushered in data point after data point to convince investors of three things…
The recovery is legitimate. It’s broad based. And it’s here to stay.
Instead of rehashing every last bit of data, though, I’ll turn to Brian Gendreau, Market Strategist at Cetera Financial Group Inc. and Professor of Finance at The University of Florida (my alma mater). He sums it up perfectly: “We’re seeing the housing recovery in the form of new home sales, housing starts, construction permits, existing homes sales, higher prices – and we’re even seeing it in the increase in pickup sales.”
Despite this wide-ranging evidence, however, all it takes is a single near-term spike in interest rates for investors to think that the recovery is going to come completely unglued.
As Business Insider reports, “Many are concerned that [spiking mortgage rates] will be a major headwind to the housing recovery.”
Shame on the pundits (and their publishers) for disseminating such claptrap. It’s total nonsense. And in honor of Myth-Busting Mondays, it’s time to share why…
Interest Rate Spike: Much Ado About Nothing
Yes, the average interest rate on a 30-year mortgage spiked by more than one percentage point over the last two months. (The national average now stands at 4.61% – up from 3.52% at the beginning of May, according to Bankrate.com.)
And yes, that means it now costs more to finance a home, so some homebuyers will be forced to scale back on their target purchase price.
But let’s get a little perspective, people. Sub-5% interest rates won’t deal a deathblow to the recovery.
As Barron’s Gene Epstein writes, “Despite alarms in the media about the crushing effects of the recent jump in interest rates, rates are still on the low side of normal.”
Truth be told, for almost 40 years (1965 to 2003), the lowest mortgage rates ever got was 5.23%. Did that curb demand? Not one bit.
Take the recovery of the early 1980s, for example. In 1983, the average mortgage rate checked in at 13.4%. Yet there were 1.7 million housing starts that year, roughly twice as many starts as in 2012.
(The current administration would be well served to study some of President Reagan’s economic principles. Heck, it might even be worth trying to channel Mr. Reagan’s ghost. Yes, the country’s mismanagement is that bad.)
So while it’s true that the days of 3% mortgages might be gone forever, that doesn’t mean buyers will pull a Houdini and suddenly disappear. Far from it. The experts agree with me here, too.
David Blitzer of S&P Dow Jones Indices says, “In the housing boom, bust and recovery, banks’ credit quality standards were more important than the level of mortgage rates.”
Newsflash: Despite loosening credit standards a tad recently, banks remain hell-bent on high quality. Even the most qualified buyers must undergo intense scrutiny. And I know firsthand, because I just went through the process.
David Rosenberg of Gluskin Sheff sets the record straight, too. “Our in-house regression work shows that incomes and jobs actually matter more,” says Rosenberg. “We went back to those years when mortgage rates rose but income growth accelerated and found that, in those episodes, on average, there was no perceptible impact of the rising yield environment on sales or starts.”
Although meager, median family incomes are rising – up by about 1.5% per year. While the job market remains challenged, it’s considerably improved over the last year, too.
Bottom line: Don’t sweat the jump in mortgage rates. Even with the recent spike, it’s still extremely cheap to borrow money to buy a home. Not to mention, interest rates never deter people from buying a house. They only limit how much they can buy. And keeping them from overreaching and engaging in bidding wars is a perfectly healthy development for the market.
Don’t sweat the 12.1% spike in home prices over the last year, either. Like mortgages, homes are still extremely affordable. I say that based on the latest estimated reading of the National Association of Realtors’ Housing Affordability Index. It stands at 145, according to Barron’s, meaning that a family with median income has 45% more money than what’s necessary to qualify for a mortgage on a median-priced home.
Ahead of the tape,