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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Don't Fret Higher Mortgage Rates

NEW YORK (TheStreet) -- Housing's been hot lately, with ultra-low supply sending prices higher and fueling a wave of construction starts -- a small but noteworthy economic tailwind. Historically cheap mortgages have been a key driver, but now rates are ticking up. Over the past five weeks, weekly 30-year fixed rates have jumped nearly a 0.6 percentage point, leading some to wonder how higher borrowing costs will impact the housing markets.

In our view, higher mortgage rates could potentially help housing markets sustain their largely underappreciated run. And as investors notice and sentiment continues improving, stocks could get a nice boost, too.

Even with the recent uptick, mortgage rates remain near generational lows, as shown in Exhibit 1. For high-quality borrowers, mortgages are still cheaper than at almost any point since 1971 -- and cheaper than they were during some very strong periods for U.S. home sales. Thus, demand should likely remain firm.

Exhibit 1: 30-Year Fixed Mortgage Rates (Monthly Average)

Source: Freddie Mac, as of June 3, 2013

Higher rates, however, likely do impact the supply side. One big driver of banks' willingness to lend is their net interest margin -- essentially the potential profit on the next loan made. Net interest margins have shrunk since 2010 and are near their lowest point in recent history, as shown in Exhibit 2.

Exhibit 2: Average Net Interest Margin of All Commercial Banks

Source: FDIC, as of June 6, 2013

This is largely due to the Fed's quantitative easing program. By purchasing long-term Treasuries and agency mortgage-backed securities, the Fed has pulled down long-term rates.

In a more normal environment -- i.e., an environment without Fed intervention -- short rates could fall in sympathy, keeping the margin between the two more or less intact. But the Fed has pegged short rates near zero, so falling long rates means a smaller gap between the two -- and less potential profit on the next loan made. That diminishes banks' incentive to lend.

Higher rates, however, likely widen banks' net interest margins, which could motivate them to lend more enthusiastically. (Hence, why we'd welcome the tapering or end of quantitative easing.) And if mortgage supply rises while demand stays strong, housing's run should continue.

Of course, since residential real estate's only 2.6% of the U.S. economy (as of fourth-quarter 2012), housing strength isn't a huge economic driver. It's simply too small.

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 16,563.30 -317.06 -1.88%
S&P 500 1,930.67 -39.40 -2.00%
NASDAQ 4,369.7730 -93.1290 -2.09%

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