Will higher mortgage rates mean fewer home sales?

Shares of homebuilders take a beating as housing prices rise.

By Jim J. Jubak May 29, 2013 8:41PM

Image: Home under construction (© Corbis)Housing prices rose in March at a 10.9% annual rate, according to data from the Case-Shiller index reported Wednesday.


But shares of homebuilders took it in the neck. Toll Brothers (TOL) plunged 5.22% and D.R. Horton (DHI) was down 4.55% for the day. Lennar (LEN) fell 4.38% and KB Homes (KBH) dropped 2.94%. Only Pulte Group (PHM) managed to score a tiny gain of 0.26%.


So why the drop on good news? Because there was bad news that, for now at least, trumped the good news. In May the average interest rate on a 30-year fixed mortgage backed by the Federal Housing Administration climbed to 3.59% from 3.35%, according to Freddie Mac. The average rate on a 30-year fixed rate mortgage with confirming loan balances increased to 3.9%, the highest rate since May 2012. The average rate on a jumbo loan increased to 4.07%.


The fear, of course, is that higher mortgage rates will translate into fewer home sales.


From the perspective of those fears, the good news is backwards looking and the bad news is forward looking.


And before you offhandedly dismiss those fears, please note the total number of mortgage applications fell by 9% last week from the immediately prior week. Refinance applications fell for a third consecutive week, the Mortgage Bankers Association reported.


If you’re looking for sectors exposed to rising mortgage rates, don’t stop with homebuilders. Financial companies specializing in mortgage-backed securities have also been taking a beating, as rising yields on this paper drive down prices.


For example, a tranche of mortgage-backed securities that traded at $107 at its peak closed Tuesday at $104. That has taken down the stocks of companies such as Annaly Capital Management (NLY) and American Capital Agency (AGNC). Annaly fell 3.47% Wednesday. American Capital Agency dropped a much smaller 0.04% Wednesday, but that’s quite probably because American Capital is already down 20.7% from its April 30 close.


Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any company mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio.

 

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38Comments
May 29, 2013 10:26PM
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My first mortgage was a VA loan at 8% in 1969.  The second also at 8% in 1974.  A third ran 10.25% on a 15 year in 1987.  I entered the real estate business as a Realtor in 1985 just as the rates had come down to 12% from as much as 17%.  Just a reminder that rates have not always been at the rediculous rates as they are now.  Pump enough worthless paper into the economy, and rates will have to go up again to counter the upcoming wild inflation.  Good luck folks.
May 29, 2013 9:09PM
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I guess the answer is YES higher interest rates will reduce Real Estate sales.
May 29, 2013 11:19PM
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The majority of the housing boom happened when rates where much higher than what we have today.

During the 1990's rates where around 7%, and from 2000 to 2007 they hovered around 5%.

At those rates, it was still a very good thing to buy a house if one could get a reasonnable price.

At today's rate and today's house prices, real estate is a bargain, provided one can put down a reasonnable downpayment.

I truly do not understand the panic. The difference in mortgage payment for a $200k loan with an interest rate of 3.59% vs 3.35% is $40 per month.... If future home owner cannot save $40 per month from other expenses to pay for the mortgage, they should nolt be looking at getting a mortgage in the first place, skip the latte at starbuck or the soda at lunch or the bag of chips and the money is saved

May 30, 2013 3:22AM
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Fewer home sales not only because of the higher prices and interest rates,  buyers don't want to get  caught up in another overblown bubble and left hanging. Once burned, twice learned. Our economy and unemployment numbers aren't as honky dory as government tries to portray it. 

 

Buyers are more cautious as prices escalate knowing banks are still holding on to a massive amount of foreclosed homes inflating demand and prices. It's just a matter of time before banks will have to start releasing these homes on the market.

May 29, 2013 11:14PM
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Obviously the figures support the correlation of rates and home sales.  Higher the rate the fewer sales.

The reason again obvious people who could have marginally supported paying a given rate are priced out of the real estate market and forced to rent.

May 30, 2013 12:26AM
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It's all about affordability, the payment. If rates go up enough prices will stabilize or go down.

Remember it's the payment based on a percent of income. 
May 30, 2013 2:50AM
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Jimmy, when rates are this low for buying a Home and Rental Rates are so High, little swings up and down now shouldn't affect any REAL buying interest. Now the far bigger concern is just who is buying homes, banks, flippers, or Real Home Owners. The bigger concern is whether folks with enough income are even getting approval due to standards changes and lack of Banks lending. The bigger concern is whether we will ever see rising incomes to spur continually home buying.
May 29, 2013 10:45PM
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It kind of depends on the cost of a house now versus the cost in a year or two when home prices and interest rates really start to go up. I don't think a small rate increase from 3.5% to 4 or 4.5% is going to stop somebody who knows homes and loans are really cheap now.
May 30, 2013 11:27AM
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Its worth mentioning the All CASH sales and EB5 visas from foreign countries can now buy in with 100k. Problem is many have told me is the corrupt Chinese, Russian and other governments give certain people there the money and loan them the other 900k secretely to come buy up all the real estate for all cash.  They dont even need a mortgage.

Cash bids way over listed prices are driving our kids and families out of ever affording a home in many areas.

 

The EB5 VISA needs to be stopped (look it up in wiki and Bing). Easy path to a greencard is what I have read. Also money laundering by governenments abroad are behind all that cash.

 

Lastly that the HUGE BUST of the 6 Billion money laundering ring (Spain, Cypruss, Russia and who knows how many  others) will stop huge cash flows of dirty money into US real estate.

Its not right we are selling off our entire country on the cheap.

Just my humble opinion.

May 30, 2013 11:15AM
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Doesn't it seem that the MSN folks are a little confused today depending which page you click on ? Higher mortgage rates ? Stocks rise as stimulus fears ease ?

 

This topic was being batted around yesterday and everyone has some good points. HOWEVER: This time of the year is not typically associated with good home sales. No one in the South wants to close on a home during hurricane season-and try and get a quote for your windstorm Insurance right now- very very high indeed. And I can't even imagine what the folks in Moore Oklahoma and other midwest areas are going trough. Will they rebuild? or will they relocate?

 

So I'm still going with my first impressions that the stimulus will be streaming right along UNTIL the EU rate gets down to 6.5%-it's at about 7.7% now. The summer time is generally not noted for strong job growth either & jobs will face 'head winds' with the implementation of Obama care in October. So when will 'Uncle Ben' start tapering off the 85 Billion ? Every time we get a little 'whiff' of this, markets react badly-so take advantage of this volatility this summer. As long as it's handled in  controlled, orderly way, we'll be just fine.

 

May 30, 2013 11:01AM
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keeping the housing market on chill, but not freeze, won't kill it. just keep it from overheating. rising rates will also allow funds seeking returns to ease back into less speculative investments. so, it's all good. the sooner there is sustained economic growth or inflation ticks up, either of which will cause a tapering of QE, the better as far as I'm concerned.  fed too I would imagine. the equity markets won't tank. they will taper off.

May 29, 2013 9:18PM
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Actually, higher rates work to stabilize home values. The higher the rate, the less likely barely able and shaky buyers get into them. At recent rates... $8/hourly people could afford homes. Those jobs can't sustain a home and it's broad costs. Higher rates take more substance to qualify for. Better quality buyers tend to go the distance. The longer they stay, the more reliable the home prices. Higher rates also require more diligence so mortgages are made to people who actually can afford them, raising up portfolio integrity. We need all of that to recover, so... higher rates are a good thing.

(V_L-- veteran lender... been there, created superb portfolios out of very bad economic periods).

May 29, 2013 9:49PM
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Mortgage rates will have to rise to over 5.5% before they begin to curb home sales, it's clearly cheaper to buy than rent and millions who foreclosed on there homes during the crash are itching to get back into the market, they are simply waiting to repair there credit first. When someone is ready to buy rates don't matter much as long as they can qualify.
May 30, 2013 10:34AM
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Another fear monger article by Jubak.  Rates are still at all time historic lows!
May 30, 2013 6:58PM
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Oh well. 4 percent is an awesome rate. If that keeps people away so be it. What a stupid article. Create useless fear.
May 30, 2013 9:55AM
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When the average person is "changing jobs" (meaning getting their buts fired from jobs that will never be coming back), on the average of seven times during the life of their non-existent working careers, buying a home when you need a stable income to pay the mortgage is a bad joke.
May 30, 2013 9:24AM
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No one wanted to buy when prices were dropping and when loans are not generally available, there are fewer home buyers.

 

But if the central banks ever allow interest rates to rise, and loans become more available, the opposite will occur to home sales! If there is a belief that mortgage rates will be rising, that fear will help drive more home sales, because the best time to get in will be now not later.

Jun 12, 2013 2:32PM
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No entiendo por que todos los articulos de bienes inmuebles quieren vender una idea que no corresponde a la realidad financiera que atravieza este pais,pues ahora esta inmensamente mas endeudado que en el comienzo de la crisis ,lo que significa un riezgo a un mayor para los inversionistas,lo que significa sin lugar a duda unos impuestos mas altos en proyeccion hacia el futuro,Cual es el deseo de incentibar a las personas a comprar bienes raices,recuerde que en el momento del descalabro financiero la ayuda real fue para los bancos pero no para los ciudadanos y menos para las familias victimas de este juego de bienes raices e hipotecas,cuyo motor es la especulacion,y estos articulos no son sino combustible  para que suba y suba y despues se desboronen los precios,por que no publican articulos del pasado,como cuando alguien dijo que estamos en una situacion economica muy solida,y a los 8 dias se desplomo el Leman brothers.La objetividad siempre esta cerca de la verdad.
May 29, 2013 10:20PM
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Crazy if you think that rates will go down that much. By that time prices will price you out. If in fact rates start climbing you will see homebuyers buying as fast as they can to lock in the rates that are so low.
May 30, 2013 11:56AM
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It's not the lower or higher rates, it's the lenders having strict or easy lending guidelines. I sold real estate in the early 80's when rates were 16%. When the boom went bust in the later 80's the rates were lower, problem was that the banks loaned anything to anybody who could not afford it based on over-inflated values. In '03-04 same old stuff, no-docs no income verification no money down and it all went poof again. Now with the low rates the banks are much fussier about borrower qualifications and values, when it is tough to get mortgages fewer sales will close.  Give it another 10 years and there will be a new group of financial gu-ru's who will not remember the past debackles and it will go around again. Anyone who can buy now with the deflated prices and low interest rates will be a very happy camper 5 years from now.  Prices went up 10%, I ain't buying that one, well maybe someplace but sure not here in New England, my house is priced below assessed and appraised values but not moving........
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