This Day On The Street
Continue to site
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

Higher Mortgage Rates Won't Hurt Housing Affordability: Freddie Mac

NEW YORK ( TheStreet) -- Mortgage rates will have to rise as high as 7% before home purchases becomes unaffordable in most parts of the country, according to economists at housing giant Freddie Mac.

The economists estimate that median-income families can afford to purchase a median-priced home with a 10% down payment and a 30-year fixed-rate mortgage in most parts of the country with the exception of some high-cost markets (primarily San Francisco south to San Diego, and Washington, D.C., north to Boston).

Affordability is calculated by requiring that principal, interest, taxes and insurance not exceed 28% of gross monthly income.

According to the economists, most of these markets can easily absorb the impact of higher interest rates without derailing the housing recovery.

Here's a chart on how rising interest rates impact affordability in the top 30 metros.

"With homebuyer affordability remaining very high, we expect that rising interest rates will have only a small, slowing effect on the home purchase market," economists Frank Nothaft and Leonard Kiefer wrote in a report.

Ultra-low mortgage rates has helped fuel a housing recovery over the past year. In recent months, however, a blend of fear that the Federal Reserve will ease its quantitative easing program and improving confidence in the economy has sent interest rates higher.

The 30-year mortgage rate has moved from about 3.4% to about 4% since May. The speed of the rise in rates and the likelihood of further increases as the economy improves have raised concerns about the sustainability of the housing recovery.

But the Freddie Mac economists believe the concerns are overdone with real interest rates -- interest rates adjusted for inflation -- still half of what they were prior to the recession. The recent capital market action will, if anything, draw buyers into the housing market. "The capital-market signal is that rates are up from the cyclical trough and are likely to move gradually higher in the coming year. In the short term this may spur renters and other first-time homebuyers who have the financial capacity, to get off the fence and buy a home before financing costs go higher," they wrote.

The outlook for refinancing is however much more pessimistic, given that it is a lot more rate-sensitive. The economists expect refinancing volume to touch $1.1 trillion in 2013, down from $1.5 trillion in 2012.

The economists cite Bureau of Economic Analysis data that shows the average effective interest rates on mortgages to be 4.7%, less than a percentage point higher than the 30-year rate Freddie Mac fixed-rate mortgage rate of 4%. The slim differential may reduce the incentive to refinance.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.24 -0.41%
FB $117.81 -0.21%
GOOG $701.43 0.82%
TSLA $211.53 -4.96%
YHOO $36.94 2.61%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs