This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Higher Rates Won't Derail Housing Recovery: BofA Merrill Lynch

NEW YORK ( TheStreet) -- The spike in mortgage rates in recent weeks is likely to dampen the housing recovery temporarily but will not derail it, according to Bank of America Merrill Lynch economist Michelle Meyer.

The 30-year mortgage rate has jumped 56 basis points since early May to nearly 4%. While the rate is still low, Meyer acknowledged in a note to clients Wendesday that the speed of the increase may give homebuyers a reason for pause.

"Potential buyers who entered the market a few months ago set their price objective based on a lower mortgage rate. It will therefore be a payment shock when they look to receive financing at today's rates. Based on the average home value, this rise in rates is equivalent to an additional $50 in monthly payments," Meyer wrote.

According to Meyer's analysis, if home prices rise 8% this year and there is no change in interest rates, the affordability index will decline from its peak to early 2012 levels. If there is a 100 basis point increase in rates, the affordability index will likely decline to early 2011 levels.

For home affordability to remain at this level with a rise in interest rates, either incomes would have to grow 18% or home prices would have to fall 15%.

Meyer does not think either scenario is likely. So affordability has likely peaked. Still, affordability levels are high and confidence from rising home prices and potential loosening of credit could prove powerful counters to rising rates, she wrote.

Meyer expects home prices to rise 8% in 2013, suggesting a moderation in prices over the next few quarters. Price appreciation is likely to slow further to 6.5% in 2014.

Separately, Trulia economist Jed Kolko noted in a blog post Wednesday that interest rates will have to rise much more before it begins to substantially affect the decision to buy versus rent.

With a 3.9% 30-year fixed-rate mortgage (the most recent Freddie Mac rate) and 20% downpayment, buying is 41% cheaper than renting nationally, according to Kolko's calculations. The analysis assumes the borrower will stay in the home for seven years and will deduct property taxes and maintenance at the 25% tax bracket.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,324.85 +58.86 0.34%
S&P 500 2,018.07 +6.71 0.33%
NASDAQ 4,607.14 +13.7150 0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs