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Rising Interest Rates Are Unlikely to Deter Home Buyers

NEW YORK ( TheStreet) -- Buying a home has become more expensive because of rising home prices and interest rates, but it appears it would take more to shake the housing recovery.

In Fannie Mae's June National Housing Survey, 72% of the respondents said it was still a good time to buy a home, even though the share of respondents who expected mortgage rates to increase in the next 12 months rose by 11 percentage points to 57%, the highest level in the survey's three-year history.

The share of respondents who believe home prices will go up in the next year also hit a survey high of 57%, underlining consumers' confidence in the housing recovery.

"Consumers may recognize that today's still favorable mortgage rates and homeownership affordability levels will recede over time," said Fannie Mae economist Doug Duncan. "Given rising home and rental price expectations and improving personal financial attitudes, more prospective homebuyers may be deciding that now is the time to get off the fence."

Housing and mortgage analysts have also argued that the rise in interest rates, while denting affordability, is unlikely to deter the recovery. In fact, some have concluded that interest rates have only a limited impact on home prices.

In a report released Sunday, KBW analysts look at past behavior of home prices in the U.S. and in the state of California during periods of rising interest rates, starting from the 1980s.

Rising interest rates did not cause a drop in home prices as is commonly feared. In fact, the analysts found that historically rising home prices and rising interest rates went hand-in-hand.

This was because "early in a recovery period for home prices, positive economic growth and increasing demand for housing offset rising financing costs," they wrote.

Interest rates appeared to have a very small impact on home prices. For instance, between January 1993 and January 1995, interest rates moved from about 8% to a little over 9%. Home prices in the U.S. still rose, irrespective of the move in rates. In California, however, home prices declined, as the local economy was still climbing out of recession.
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